At the end of 2018, the world’s second-largest economy slid further into a concerning slowdown. Geopolitical events – including the U.S.-China trade war – have compounded matters, but the true cause is more complex thanks to the impact of government policy and structural shifts in the economy. In this post, we’ll examine exactly what’s going on and what implications exist for the Asian supply chain.
In 2011, China began to show signs of departing from its upward trending growth rate. The manufacturing giant’s export orders weakened significantly, banks tightened their lending limits and the government swiftly reacted with monetary and fiscal measures meant to boost the economy. The situation served as a surprise to the notoriously booming country, which had boasted annual growth over 8% since the mid 90s.
China lingered in this state of slowdown until 2017, when growth actually surpassed market expectations at 6.9%: the first true acceleration in seven years. The final quarter of 2017 met expectations and remained on pace at 6.8%. With investments in infrastructure lending to accelerated growth – and the bragging rights of a high-speed rail network – it appeared that slowdown had run its course.
However, it wasn’t the case because in 2018, the Chinese economy reported the slowest growth rate in 28 years.
These are telltale signs of a downward economic cycle. Why is this happening, and will the recently announced measures by the National People’s Congress be enough to bring relief?
The Chinese economy has always been hard to measure. It is driven by political initiatives, which makes it more difficult to objectively analyze the numbers – and creates ambiguity when it comes to determining a root “cause” of this slowdown.
Despite the unique complexities, the slowdown can be attributed to at least four factors.
China isn’t the only economy facing a slowdown. Europe, the UK, Japan and several emerging markets have soft short-term outlooks. The global economy as a whole has stepped on the brakes, as reflected in the drop-off in world trade growth (nearly 0% at the end of 2018!)
Risks are prevalent. Financial conditions across the board are tightening. Sentiment is negative. Consumers and companies are wary.
Despite an increase in isolationist policies, the global economy is undeniably interconnected. What’s happening in Europe – including the uncertainty over Brexit – indirectly impacts China. People and organizations are waiting to see what will happen next and holding off on spending, which means the rest of the world is demanding fewer Chinese manufactured goods.
While the U.S-China trade war is not the sole reason for the slowdown, it is not helping the situation.
The $250 billion USD tariffs applied exclusively to China has added pressure to its economic health and is just another item China must balance as it attempts to support growth and stabilize markets.
That’s why March’s National People’s Congress announced several measures aimed at diffusing the trade war. These include increasing foreign firms’ access to markets, reducing the number of closed sectors and shoring up intellectual property laws.
Hopefully as these resolutions play out, trade tensions will ease and the greater economy will be in a better position for relief.
After years of routinely investing in infrastructure to lift its growth rate, China has accumulated significant debt. To make matters worse, companies and consumers in China are also drowning in debt thanks to more expensive living costs.
To raise consumer confidence and boost consumption, the government injected more cash into the economy. But with sentiments still negative, the extra money floating around only increased inflation, leading to prices that relatively flat incomes can’t afford. Chinese consumers continue to suffer from the broadening money supply.
This situation is the definition of a negative feedback loop: In an attempt to reverse debt, China as a whole has inadvertently gone into even more.
Now that its economic slowdown has become a visible issue, China has shifted its priorities away from tackling its obligations and back to pushing a higher growth rate, which means a return to debt-inducing activities that further strain the country and its constituents long-term.
The Chinese government’s plans to ease back into growth outline spending more money on infrastructure, putting more money into circulation, encouraging bank lending and cutting taxes – possibilities that only continue to increase their liabilities.
These acts of stimulus in 2018 (and planned for 2019) are not convincing economists. Pumping more money into the economy has led to more fiscal deficit than a reignition of growth, and the ROI of government spending is proportionally lower because the Chinese economy is so large.
Thus, this excessive debt isn’t helping the situation at all. It’s actually leading to slower growth and higher burdens for consumers and companies alike.
Despite what some policies suggest, China recognizes its issue with debt. The government has vocalized a commitment to deleveraging, but simultaneously plans for more stimuli.
These initiatives are at odds with each other, which further suggests the trouble that the Chinese economy is in. Trying to shed debt while also hitting ambitious growth targets is a long shot – and nothing is achieved by switching between each initiative whenever signals change. The Chinese economy is struggling to find the balance it needs between growth and sustainability, which is causing its economy to continue to suffer.
So, why is this troublesome?
After the 2008 financial crisis, China served as one of the few engines of growth for the global economy. So as China goes down, the rest of the world is at risk of the same fate.
There’s no question that Asian suppliers are hurting in such an environment. Here’s how – and what they can do to shift terms in their favor.
Small manufacturers in China have been hit particularly hard by the economic slowdown.
This is largely due to a squeeze in working capital, which has put many already vulnerable manufacturers out of business.
Though China’s manufacturing regions have historically boomed, the lack of demand from the rest of the world creates issues for the supply side.
At the end of 2018, many exporters “front loaded” operations. They hiked production levels and shipments to fill orders before the Chinese New Year and in anticipation of an increase of tariffs.
But following this spike, exporters faced a huge drop off. Now, there are less orders to fill: In February, Chinese exports plunged by over 20% (in dollar terms) compared to the year before. While exports typically dip in this time thanks to factory closings for the Chinese New Year, the numbers are more drastic than usual.
This weak report puts small suppliers at risk of going out of business. Production is low, orders are minimal and employees have to be laid off.
In conjunction with negative business sentiment and increased tariffs, buyers across the world are reconsidering their supply chain to avoid the hardships of working with Chinese suppliers.
Lacking the clout of larger buyers to leverage or make demands of their own, these suppliers are losing out on contracts. This forces them to scale back production even more, stretching cash flow to the limit.
Under the guise of “supply-side reform,” China has been focused on cutting industrial overcapacity and improving the quality of economic growth, actions that have taken many steel mills, coal miners and other suppliers out of business.
The government’s financial de-risking campaign discourages banks from lending to SMEs. In this attempt to improve quality, many small suppliers – who already struggle to receive financing in normal conditions – are unable to receive funds due to perceived levels of risk.
Despite the dire outlook, suppliers need not suffer unnecessarily. They can take contracts into their own hands and save their business even during an economic slowdown. One answer lies in accounts receivable financing.
Stenn offers innovative accounts receivable financing, giving suppliers liquidity when they need it the most. Contact us today to learn more.
Stenn International Ltd. is a UK-based, non-bank trade finance provider specialising in cross-border trade. Stenn’s trade finance solutions are comprehensive and can be combined to cover the entire supply chain from purchase order to delivery of goods. Innovative practices allow Stenn to finance in sectors and geographic regions currently underserved in global trade. The company operates globally with offices in Buenos Aires, Los Angeles, Dallas, New York, Miami, London, Amsterdam, Dusseldorf, Berlin, Mumbai, Chennai, Singapore, Hong Kong, Guangzhou, Hangzhou, Suzhou, Shanghai and Qingdao. Learn more at https://stenn.com or follow us on Twitter, LinkedIn and Facebook.