Domino effect in the Chinese economy

Projections of global economic growth keep getting worse. In late July, the IMF adjusted its expectations vs. April (down by 0.4 p.p. to 3.2% and by 0.7 p.p. to 2.9% for 2022 and 2023, respectively). If we take China, the second largest economy in the world (18% of global GDP), the negative growth trend is quite clear. According to the Chinese National Bureau of Statistics, in the first six months of 2022, GDP grew by only 2.5% y-o-y, while in the same period of the pre-crisis 2019, this rate was 6.3%, and last year it was an impressive 12.7% due to the low base effect of the pandemic (see Fig. 1).

This year, in addition to continuing COVID restrictions, the economy is seriously affected by difficulties in the real estate sector. While early 2021 saw sustainable double-digit y-o-y growth of investment in the sector (as a cumulative total), since April 2022 the amount of investment has been declining (see Fig. 2). Investors are scared off this market because of the developers’ debt crisis and reluctance of individual clients to buy residential real estate because of continuing restrictions. Sales of commercial real estate in January–June slowed down both in volume (by 22.2% y-o-y to 689.2 million sq. m) and in value (by 28.9% y-o-y to RMB 6,607.2 billion)[1].

Tensions in the real estate sector affect the metals industry, which is key for China. Shrinking demand led to a 6.5% y-o-y decline in steel production in January-June 2022 to 526.9 million tons (see Fig. 3), because steel mills are forced to shut down for maintenance[2]. Profits of major companies[3] engaged in the production and processing of non-ferrous metals fell by 68.7% y-o-y during this period, which is almost 2% vs. the first six months of 2020 (in January–June 2021 profits grew by 234.1% y-o-y, see Fig. 4).

With demand for steel going down, some companies selling coking coal decided to scale down production until feedstock prices stabilize, causing warehouse inventory to plummet to its historic minimum since 2015[4].

Some analysts believe that the crisis in the Chinese metals sector may continue for a few years[5]. Actions taken by the Chinese authorities and metals companies to reduce production and increase infrastructure spending appear logical, though stubbornly shrinking customer demand for real estate and reluctance to pay mortgages for empty residential properties[6] may add to the already difficult situation.