Numerous forecasts at the beginning of the year attributed the potential rise in global financial markets to the possibility of a Chinese economic recovery in 2023. As two months have passed, the question is whether this forecast is as realistic as it was at the start of the year.
Summary
- China's growth outlook has deteriorated in recent years, with Covid-19 having a strong and lasting impact.
- The US-China trade war may have moved to the next level with US restrictions on semiconductor exports to China.
- Multinational companies may have recently reconsidered the benefits of their operations in China amid the US-China relations tension and strict Covid-19 restrictions.
- The Container Availability index confirms that China's exporters may not have fully recovered from Covid-19 restrictions in addition to the US export controls and companies moving their operations offshore.
China's growth outlook
On March 5, China set a 5% growth target for its economy this year, below the country's target of 5.5% last year. China's GDP growth rate has deteriorated considerably since double-digit numbers two decades ago. Numerous reasons can be discussed for such development, such as the new reality of China's decreasing population, the relationship with the US becoming more nervous, and the aftermath of the Covid-19 pandemic.
Despite China's growth outlook of 5.5%, the country's economy managed to grow 3% in 2022, which, together with the 2020 number, is the lowest since 1979.
US-China relations
The US-China trade relations have deteriorated dramatically in recent years. After decades of growing trade between the US and China, the US started imposing tariffs on more than 300 billion USD worth of Chinese products in 2018. On October 7, 2022, the Biden administration imposed a new set of export controls, including a restriction on the supply of semiconductors and other chip-making equipment to Chinese chipmakers, with the aim of cutting off the supply of critical technologies used in advanced computing and weapons production.
This action has been described as a massive escalation of the trade and geopolitical tensions between the two superpowers. It is expected to have long-term effects on the development of the semiconductor industry and even global economic leadership for decades to come.
China consumes more than 75% of the semiconductors sold worldwide while producing only 15% of the world's output. Moreover, according to industry experts, Chinese equipment manufacturers are up to five years behind their foreign counterparts and cannot fully compensate for the loss of technology from US suppliers. In 2021, the Boston Consulting Group estimated that China might need an additional upfront investment of at least 1 trillion USD to build a fully self-sufficient local chip supply chain.
Furthermore, on January 27, 2023, Japan and the Netherlands also agreed with the United States to restrict the advanced chip-manufacturing equipment exports to China, potentially worsening China's outlook further. According to World Bank data, high-tech exports by China were nearly 30% of its total manufactured exports in 2021. This statistic may potentially provide an estimate of exports that Western semiconductor controls may impact.
Companies leaving China
As political tensions between China and the US have risen, international companies may have begun to reconsider the benefits of doing business in China. Apple, for example, has begun moving its operations from China to Vietnam. Samsung moved its Chinese production to Vietnam two years ago. Even Volvo, owned by the Chinese Zhejiang Geely Holding Group, recently announced its plans to open its first factory in Europe in 60 years. The list goes on with companies like LinkedIn, Yahoo, Google, and others. And the reasons for relocation are not only related to the tension between the two superpowers.
Another crucial reason for multinational corporations to consider leaving China or reducing investments in this country may be how the Chinese government dealt with Covid-19. The tight lockdown measures combined with travel restrictions as part of the Zero-Covid policy may have caused frustration among foreign companies. Disruptions to air freight, trucking and shipping services had a significant impact on international and local supply chains, with countless ships sitting in Chinese ports due to restrictions and labour shortages.
While most restrictions have been discontinued, corporations may worry about the potential of reintroducing further restrictions in the future. A survey carried out by the American Chamber of Commerce in China concluded that overall confidence toward business activities in the country has decreased. The majority of respondents reported reduced production volumes related to a lack of supplies or manpower as well as uncertainties related to government activities. Similarly, the EU Chamber of Commerce in China released a survey in which 23% of EU businesses have considered relocating from China.
CAX index
The Container Availability (CAX) index allows the monitoring of full containers around major ports of the world, specifically, their movements due to imports and exports. A CAX value of precisely 0.5 means the same number of containers enter and leave the port within the same week. A CAX below 0.5 indicates that more containers are leaving a port than entering it (exports are higher than imports). Conversely, a CAX value above 0.5 indicates that more containers enter than leave the port (imports higher than exports).
The CAX index might be interpreting the disturbing reality that Chinese exporters face. For example, in one of the major Chinese container ports – Shanghai - the index for 20-foot dry storage containers fluctuated between 0.53 and 0.71 throughout the whole year of 2022 and stabilized at 0.65 for ten straight weeks up until the week ending on March 5. A similar situation was seen in Shenzhen port. Such readings suggest that Chinese ports are seeing a much larger number of containers arriving with imported goods than leaving for exports.
Another aspect to consider is the increasing number of empty containers accumulating in these ports. According to the container monitoring platform Container xChange, an increase in empty containers in Chinese ports has been visible along the whole coastline for the last five months. The increased availability of containers in China as well as other regions of the world indicates slower economic growth and weakening consumer demand.
Summary
While global financial markets may be betting on a rapid recovery of the Chinese economy, the Asian superpower may need more time and resources to regain its strength. This task could be made more difficult if the US soon imposes new restrictions or sanctions on China.
Considering the importance of Chinese manufacturing in both –global manufacturing and the Chinese economy – the above-discussed export controls and Chinese government-imposed restrictions resulting in manufacturers leaving the mainland may have long-term effects on the number 1 exporter in the world.
Santa Zvaigzne-Sproge, CFA, Head of Investment Advice Department at Conotoxia Ltd. (Conotoxia investment service)
Materials, analysis, and opinions contained, referenced, or provided herein are intended solely for informational and educational purposes. The personal opinion of the author does not represent and should not be constructed as a statement, or investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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