While China’s zero-COVID policy and the litany of associated shutdowns and reopenings in major Chinese cities have been the primary reasons behind China’s slowing economy, there are three other important challenges in play that need to be understood.
First, Chinese export growth is slowing because, in a post-pandemic world, U.S. and European consumers are switching their spending back to services and away from goods, many of which are produced in China. During the pandemic, when U.S. and European consumers had to stay home, and couldn’t travel, or go to restaurants, they switched their spending to goods to improve their homes, upgrade home offices, etc. But now the pendulum is swinging back the other way.
Second, the Chinese economy has a heavy debt load, and the challenges in the property market continue to serve as a serious drag on the Chinese consumer.
Third, and existing as a longer-term concern, the Chinese population is no longer growing. In fact, the labor force may decline later in the decade as the age 65 and older cohort continues to get larger and larger. While real GDP growth can be sustained by growth in labor productivity, once the labor force stops growing, economic growth will slow too. China averaged nearly 10% annual real GDP growth from the 1990s into the 2010s, but for the 2020s, growth may average more around the 3% or 4% of a mature industrial economy – still more than U.S. or Europe, but well off its former pace.
The bottom line is that a slower-growing China will not be the engine of commodity demand it once was. And, as growth has slowed in 2022, commodities from copper to aluminum, and gold to oil, have seen material declines from their peak levels earlier in the year.