The war puts China in the face of what could be a perfect storm

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China’s stance on Ukraine casts clouds over the country’s economy. Stock markets are falling, GDP will have the worst performance in decades, the covid situation is getting worse, the real estate bubble continues to worry, and there are even fears about the country’s food supply. The war in Ukraine could make everything worse

News of possible Chinese military support for Russia – and fears of possible Western sanctions against China if that support is confirmed – sent Chinese stocks tumbling yesterday. The Bloomberg report did not hesitate to use the word “panic” to describe the sales of shares of Chinese companies whose value is in steep decline. Russia’s war on Ukraine is just the latest factor in what could be a perfect storm threatening the Chinese economy.

Let’s start with the “carnage” on the Hong Kong stock market (the phrase is coined by Bloomberg Businesses market reporter Rebecca Choong Wilkins). The Hang Seng, the benchmark index of the Hong Kong Stock Exchange, opened lower and found itself below the psychological bar of 20,000 points, for the first time since mid-2016. During the session, the Hang Seng fell 5% to the lowest level in six years – but the shares lost as much as 13%.

The decline was particularly steep for the Hang Seng China Enterprises Index, which measures the behavior of Chinese companies listed in Hong Kong: it fell 5.16% in what was the worst day since the 2008 financial crisis. The Hang Seng Tech Index, an index that tracks the stocks of Chinese technology companies listed in Hong Kong, down 7.54%. Mainland Chinese stocks followed the same trend, but with more moderate declines: Shanghai lost 1.30% and Shenzhen 1.61%.

As of Tuesday, Asian markets continued to be in the red, pulled into negative territory, mainly due to the increase in COVID-19 cases in China which has shaken the confidence of investors – who are already worried about the war. in Ukraine – and which have cast a cloud over the prospects for the world’s second largest economy.

Covid, real estate, political pressure

Fears over Beijing’s alignment with Moscow – especially the prospect of being able to help the Russian armed forces – and potential sanctions against China by Western countries and their allies, were the main reason for the fall in Chinese stock markets. But the war in Europe is not the only source of concern for investors and analysts of the Chinese economy.

China’s government forecasts 5.5% GDP growth for 2022, the weakest growth in three decades – the announcement was made by the PM in early March during the People’s Congress session national, but the forecast is seen by many as optimistic, especially given the course of the Russian war.

The announced poor performance of the economy is the result of a combination of problems: the war, the Chinese real estate bubble which continues to haunt the financial system, the covid pandemic which does not let up, the disruption of international supply chains, the difficulties to secure the energy supply of the country’s major industrial regions, and even the fears concerning the food supply.

On the other hand, Xi Jinping’s tougher stance towards greater control of big business is also making investors nervous. The heavy hand of Beijing is especially felt on the big technology companies, while the Chinese president tries to pull the rug from under the feet of the oligarchs who have become too powerful. Several have already fallen, others are expected to fall in the year of the Chinese Communist Party Congress, which is expected to approve an unprecedented third term for Xi.

The next target for regulatory sanctions against large conglomerates will likely be Tencent, the tech giant that owns China’s main internet portal and controls WeChat Pay. According to the Wall Street Journal, Tencent is set to face a record fine for violating central bank regulations.

On the other hand, the pandemic continues to give headaches to the Chinese. The ‘zero covid’ policy has succeeded in keeping incidence levels low, but it will make it difficult for the country to reopen to the ‘living with the virus’ phase, as Chinese people’s immunity to coronavirus will be lower than in other countries. other countries.

Despite the “zero tolerance” with covid, on Saturday and Sunday China recorded two thousand three thousand new cases, which defies the principle of “zero covid”. “The Covid situation in China has deteriorated alarmingly over the past week,” said Nomura economists’ market analysis. The consequences are there: Hong Kong has been living for many weeks under enormous restrictions on movement and work, and cities on the mainland such as Shanghai, Shenzhen or Chanchun have suffered a growing impact. The latter two, which are major industrial hubs, are subject to exceptional measures, such as the closure of public transport and all non-essential services. Factories are closed and the consequences will be felt in an economy that already faces many other challenges.

Another reality that puts pressure on the production capacity of China’s major industrial regions is energy supply. The country is the world’s largest energy importer – it has plenty of coal, but depends on the oil and gas it buys from abroad – and has suffered from unstable supply, falling short of the needs of industrialists and individuals. And now he has to deal with the huge increase in energy prices around the world.

China is also very dependent on food imports, especially wheat and other grains, the price of which has also skyrocketed since the start of the Russian war, given that Russia and Ukraine are the largest world wheat exporters. Last week, the government made China’s self-sufficiency in essential food items a national priority. But that’s easier said than done.

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