Due to the continued sluggish economic activity and weak consumption in China, the country is unable to absorb excess capacity, leading to a surge in inventories and sharp price declines for commodities such as steel and soybeans. Experts warn that recent economic data reflects severe signs of economic downturn in China, which may result in social discontent.
According to reports by Bloomberg, coal inventories in mainland China have reached an unprecedented 635 million tonnes by the end of June this year, up from less than 90 million tonnes at the end of 2021. In July, onshore crude oil inventories soared to a 10-month high, exceeding 1 billion barrels.
As fuel demand in China remains weak and inventory levels rise, Saudi Arabia and OPEC+ allies are preparing to relax some production cuts from October this year.
The real estate sector continues to decline, with sales of the top 100 real estate developers in China plunging by 26.8% year-on-year in August, a wider decline compared to 19.7% in July. This downturn has also dragged down demand in the construction industry, leading to a crisis in the Chinese steel industry. Port inventories of iron ore have surged to the highest level for the same period this year, while copper inventory levels are at the highest for the period, leading large copper mining companies like BHP Group to downgrade their forecasts for Chinese copper demand growth to 1% to 2%.
Due to insufficient domestic demand, China’s copper exports surged by 187% in June, reaching a historic high; diesel exports, used in factories, construction sites, and transportation, increased by 180%; aluminum oxide exports jumped by 109% year-on-year to the highest level in two years.
The processing profit margin of hot-rolled coil (used for automobile bodies and household appliances) in China is nearing historically low levels, potentially necessitating further production cuts, which would further decrease demand for raw materials in steel production.
The economic slowdown has also dampened meat consumption, with soybean meal inventories reaching their highest level since 2016.
The sluggish state of the Chinese economy is also evident in various official data released by the authorities.
According to data from China’s National Bureau of Statistics, the worst performing sectors in the first five months of this year were crude oil processing, coal mining, and iron and steel manufacturing, with profits in the crude oil processing industry plummeting by 178% year-on-year and coal mining decreasing by 32%.
In August, the official Purchasing Managers’ Index (PMI) for manufacturing dropped from 49.4 in July to 49.1, a larger decline than expected. The PMI is considered the “barometer” of the national economy, with readings above 50 indicating expansion in manufacturing activities and below 50 indicating contraction.
Statistics from China’s Ministry of Finance show a 5.4% decrease in corporate income tax revenue in the first seven months of this year.
The China Securities Association released the “China Listed Companies Semi-Annual Business Performance Report 2024,” indicating an overall decline in profits for the manufacturing industry in the first half of the year.
In August, the sub-index for new export orders was 48.7, remaining below 50 for the fourth consecutive month, signaling troubling trends for the key growth engine of exports.
Sun Guoxiang, Associate Professor of International Affairs and Business at Nanhua University in Taiwan, stated that recent economic data reflects severe signs of economic downturn in China.
He analyzed that the sharp increase in inventories of commodities such as coal, crude oil, iron ore, and soybean meal indicates a severe lack of market demand, with goods produced by companies unable to be effectively consumed by the market, reflecting the challenges faced by traditional industries. The PMI remaining below 50 for four consecutive months indicates reduced orders and production slowdown in the manufacturing sector.
David J. Wong, an economist from the United States, expressed that the data reflects a rapid decrease in all factors that drive the Chinese economy, with exports performing poorly, domestic demand and investment causing concerns, and no sign of any improvement or stabilization. He believes it is not yet the worst time.
“Crude oil, coal, and steel have traditionally been important indicators of Chinese economic investment, and they are performing very weakly now; exports are also not good, with expensive tariffs reducing demand despite existing orders from Europe and the United States; the export situation to the 14 East Asian countries is not ideal; exports to countries in Asia, Africa, and Latin America have limited consumption capabilities and very low profits, if any; Russian exports have little impact on driving the Chinese economy.”
Sun Guoxiang pointed out that although Beijing’s industrial policies have promoted the development of China’s manufacturing sector for a certain period, they have revealed problems such as over-reliance on exports and insufficient domestic demand when the global economic environment changes.
He analyzed that Beijing’s industrial policies heavily rely on exports, offering various subsidies and incentives to expand manufacturing capacity while neglecting the cultivation of domestic demand. This model appears vulnerable when global demand shifts and trade conditions deteriorate, showing the issues of weak external demand and insufficient domestic demand. Without a robust domestic consumption market to support it, the manufacturing sector struggles to achieve sustainable development.
Currently, the economic policies provided by the Chinese authorities still focus on developing modern industries but lack effective means to drive domestic consumer consumption.
Sun Guoxiang warned that if the current economic policy fails to effectively address the issues of weak external and domestic demand and makes no adjustments, the economic growth rate may further slow down, aggravating social inequality and increasing public concerns about declining living standards. If economic policies do not effectively improve people’s livelihoods, they may provoke social discontent and increase social stability risks.
David J. Wong believes that the Chinese economy is export-oriented, having relied on rapid development thanks to the European and American markets. Beijing needs not only to change its economic policy but also its diplomatic policy. Failure to do so would be detrimental to China’s export industries.
Furthermore, Beijing’s economic policies primarily support state-owned enterprises rather than private enterprises. It is not just about policies but also market space, as most profitable and large-market sectors are monopolized by state-owned companies, leaving little room for survival for private enterprises.
He mentioned that under the current CCP policy, state-owned enterprises will continue to grow, while private enterprises will diminish. With decreasing consumer consumption and a deteriorating economic environment, a significant part of the economic growth that resulted from China’s entry into the WTO may regress instead.