China’s fractious trade relations with the US and its allies are strengthening diplomatic and commercial ties between the two regions, said Ben Simpfendorfer, a Hong Kong-based partner at the management consulting firm.
“China’s commercial relations with the Middle East are experiencing a renaissance,” he said in an interview. “The past few years have been transformative. It’s no longer a story of simply trading oil and consumer goods, it’s now a much broader and deeper relationship.”
Trade data over the past six years underlines the shift. China and the Middle East traded US$507.2 billion of goods in 2022, according to customs data, double the level in 2017. Trade with the Middle East rose 27 per cent in 2022, surpassing the growth with Southeast Asian nations (15 per cent), the European Union (5.6 per cent) and the US (3.7 per cent).
“What we are seeing is that Chinese electric vehicle (EV) makers are increasingly investing in other markets,” Simpfendorfer said. “They are beginning to open up factories in the emerging markets, [while] also looking at options in Europe or the US. That is an encouraging dynamic, because it does help to ease trade tensions and support employment growth in other markets.”
China’s energy trade with Middle East to surge in light of Iran-Saudi deal: UBS
China’s energy trade with Middle East to surge in light of Iran-Saudi deal: UBS
However, Simpfendorfer warned that trade tensions between China and the West will persist and could worsen soon, especially after the US presidential election. Exports will remain under pressure over the next few years, and worries about overcapacity in China will remain on the front pages, he added.
Policymakers in the US and Europe have raised concerns about excess production of EVs, batteries, and solar panels, among others. If China continues to offload its excess output in overseas markets, Western firms could be forced to slash prices and cut jobs, they have warned.
During her trip to China earlier this month, US Treasury Secretary Janet Yellen sought to formalise discussions about excess capacity in China’s EV sector. Chinese officials pushed back against the move, saying that local exporters have already “fully responded” to those concerns.
Despite growing trade tensions, China will remain the world’s top manufacturing hub and a major exporting country, due to its sheer size and ability to innovate, Simpfendorfer said.
“There is no simple replacement for China’s manufacturing industry,” he added. “It’s difficult to replace its scale, efficiency, speed, and increasingly, its innovation, whether that is battery storage or new EVs, which will remain compelling for other countries around the world seeking to import these products.”
A leading Chinese investment bank has amplified calls for Beijing to bolster fiscal support to consumers and businesses, citing a relative gulf in effect for pandemic-era stimulative actions taken by China and the United States.
“The US had bigger fiscal expansion during the Covid years. China needs to crank up fiscal support in the near term to break the vicious spiral as weak economic fundamentals and weak confidence are feeding off each other,” said Kevin Liu, a managing director of CICC Research.
“More fiscal support can encourage consumers and the private sector to invest and expand,” he wrote.
Lawmakers will convene in the Chinese capital next week to review the year’s policy agenda and national economic targets.
Both China and the US engaged in monetary loosening during the Covid years, although they are presently in different cycles.
China’s M2 money supply – an aggregate value of a country’s liquid assets, including currency in circulation and private banking deposits – had double-digit growth for most of the last two years, CICC said, but it failed to disperse deflationary threats and jump-start private investment, as much of the money was in credit and loans.
More fiscal support the catalyst to revive China consumption, housing market
More fiscal support the catalyst to revive China consumption, housing market
In contrast, the US’ M2 supply was trimmed by about US$500 billion last year to tame inflation. However, the bank said, its economy still fared better, maintaining strong demand and consolidating its lead over China in terms of economic size.
“In the US, money reached people’s hands, while in China, the money [came] from banks and ultimately flows back to banks,” said the CICC report.
CICC added that much of the 42.6 trillion yuan in new loans disbursed for businesses between 2020 and 2023 did not help spur the country’s economic recovery, as they became deposits or were otherwise used to service old debts.
Credit support, compared to direct fiscal disbursement – which, per CICC, carries “almost zero cost” to revive consumption and investment – was designated as an option which generated additional costs and inefficiencies, as businesses tended toward lukewarm responses.
“In China, credit support becoming bank deposits suggested low investment return and tepid credit demand, and fiscal support remained inadequate,” the bank said.
When the private sector is unwilling or unable to expand, the CICC report estimated, the central government needs an additional leveraging of 5 to 6 trillion yuan in the first half of 2024. The bank said such an approach is necessary to bring up the “fiscal pulse”, a measure of the changing impact of the budget on the economy, to 4 per cent from its current three-year low.
China’s plan to grow economy with infrastructure is self-contradictory: analyst
China’s plan to grow economy with infrastructure is self-contradictory: analyst
Several economists and policy advisers have already issued recommendations for direct fiscal backing.
Yao Yang, director of Peking University’s National Development School, has for years suggested direct cash allowances for low-income residents.
“The most effective way to encourage consumption is to issue cash [coupons],” he told Chinese media outlet Yicai.
“A one-dollar cash coupon will multiply to three to five dollars of spending.”
These dynamics seem to be playing out for a number of Chinese home owners in Australia, where the central bank has hiked interest rates on 13 occasions since 2022.
After their Australian bank account ran dry early last year, the bank set them a deadline to sell the property by this month.
“The purchase price plus the cost [of repairs] meant that they needed A$1.7 million to A$1.8 million [to break even],” Li said.
Just last week, they agreed to let go of the property for A$1.4 million.
But this would have been a no-go because Beijing has its own strict capital controls to prevent citizens from moving cash freely out of the country. Since 2016, the government has tightened its efforts to stem cross-border currency flows, imposing a US$50,000 annual cap on Chinese citizens wishing to buy foreign currency.
Another Chinese investor who lives close to Shanghai took out a mortgage to buy a A$600,000 home in Chiswick, another suburb of Sydney, in 2009.
The unit had a tenant, but the investor anticipated that she would not be able to increase the rent by a sufficient amount to keep pace with interest rates, said Li.
At the end of last year she opted to sell the property for A$940,000.
“She said she would rather prepare early than start getting notices from the bank,” Li said.
The sluggish growth of the world’s second-largest economy – last year saw the smallest expansion in three decades outside the coronavirus pandemic, at 5.2 per cent – is adding to the burden of overseas property owners, Li said.
Traditionally the property segment in China creates wealth for its citizens, but the current downturn is having the opposite effect.
The property crisis at home has shaken confidence, denting spending on homes as developers struggle to repay debts and deliver residential projects on time.
In December, prices of new homes in 70 medium and large cities fell 0.4 per cent month on month after a 0.3 per cent drop in November, according to official data. It was the steepest monthly decline in new-home prices since February 2015.
Real estate investment in terms of value fell by 9.6 per cent to 11.09 trillion yuan (US$1.5 trillion) last year, about the same as the decline in 2022.
Some overseas markets have seen a dramatic fall in the number of Chinese homebuyers as spiralling interest rates and the economic woes at home have made leveraged property purchases less affordable.
In Singapore, for example, just 160 Chinese investors bought property last year, the lowest since 2008, according to PropNex Realty. The city state, which manages its monetary policy via an exchange rate band, began its policy tightening streak in October 2021.
The trend has been exacerbated by a recent hike in the stamp duty paid by foreign buyers in Singapore, according to Alan Cheong, executive director, research and consultancy at Savills.
“Chinese activity has been toned down to almost an inaudible level,” Cheong said.