- September 22, 2022
China’s Economic Struggles Impact Global Supply Chains
In this post we look at the slowdown in China’s economy, both domestically and in the global context to understand the implications on global supply chains. Some of these topics are covered in our Q3 2022 Retail Sourcing Report, which provides in depth analysis of the variables impacting retail global sourcing,
COVID-Zero Policy: China has held steady on its “dynamic COVID-zero” policy, designed to stop the spread of COVID-19 within its borders, despite the ongoing economic and social impact. Among the strictest in the world, China’s policies have resulted in rolling lockdowns of neighborhoods and sometimes even entire cities for days or weeks in response to even small outbreaks of Covid. closures have congested ports and highways while shutting down factories.
Economy: Following rolling COVID lockdowns, tighter financial controls and a deepening real estate crisis, China’s economy is expected to grow by 3.3% in 2022, the lowest growth level in 40 years. This follows a strong start to 2022 as pandemic recovery spurred global demand for China’s goods. The IMF, World Bank and others lowered China’s growth forecast by 1.1% after Q2 data was released. Growth is expected to pick up through to 2023, but this depends on China’s pandemic response and on global and domestic demand.
Domestic Front: The lockdowns have also had a wider domestic impact. The real estate market has stalled, with some developers defaulting on loans and distrust with the banking system increasing over fraud allegations. Restaurants and shops across China’s cities closed, and consumer spending has fallen, resulting in some of the highest unemployment on record, especially among the young. Major brands such as Nike and Starbucks have been cautioning that softening spending in China will take a toll on their sales. Critics have grown more vocal about questioning whether the country’s COVID-19 containment policies have been worth the considerable tradeoff.
Wages: While most of the world suffers under high single digit inflation, China has kept consumer price inflation hovering around 2% for Q2 and around 2.5% so far for Q3. This positive news may be misleading though as Chinese workers at the bottom of the wage hierarchy are feeling the pinch of higher prices, despite government policy to maintain steady wage growth. While much of the narrative about China’s economy is government controlled, reports indicate that successive lockdowns have taken a toll. Factories are operating well below capacity and sales in a cross-section of consumer categories were down by 0.7% in H1 2022. Reports of higher employment and resistance against China’s strict COVID prevention measures also indicate a more disgruntled workforce.
Currency: The Chinese yuan has remained stable, despite the current weakness in the Chinese economy and China’s ongoing battle to contain COVID-19. While the currency weakness has been partially offset by falling freight costs, inflation in the range of 8% has slowed consumer purchasing. Through the first half of 2022, the yuan depreciated by around 5.4%. Beijing maintains tight control over their currency, allowing the yuan to fluctuate in a limited range.
Commodities: Beijing’s Zero-COVID policy has resulted in significant reductions in demand for a cross-section of commodities, as factories closed and supply-chains remain strained. The U.S. ban on Xinjiang cotton has raised some questions about where a significant part of the world’s cotton supply will end up. Controlling raw material prices has been a priority for China this year. Beijing has indicated it would be open to increasing domestic supply and enhancing supervision to calm the markets and has suggested it could crack down on speculation and hoarding, both of which have been driving up prices.
All these issues and more are covered in the most recent CBX Q3 2022 Sourcing Report. To learn more about how to address some of these concerns with the CBX platform, feel free to contact us directly.