China’s Current Economic Challenges in 2022

Mike Dunn | Thought Leader

For investors, China, Chinese manufacturing, the Chinese supply chain, the 2020 842 million Chinese online purchasers, geopolitical risk, and related business risks are real factors in any investment decision.

Here are issues to consider in your quest to find profitable investment niches—Change-is-opportunity for investors.

Real Estate is the Key Point to the Chinese Economy

Real Estate is 24% of GDP in China and is a primary revenue source for local PRC municipalities.
Hundreds of unfinished apartment buildings have been partially paid for in advance by life savings from the Chinese middle-class.
Real Estate sales proceeds make up 30% to 40% of local municipality budgets. Unfortunately, this money has dried up due to the lack of capital and jobs.

New Banking Scandal of Five Large Local Banks in China

In April of 2022, hundreds of thousands of Chinese people could not access their money resulting in a banking fraud a five regional PRC banks.
It is estimated that losses in personal deposits are at USD $6 Billion, affecting 220 million Chinese middle-class workers. There is no way to verify this number. This will slash demand for foreign goods to China for the foreseeable future by some percentage.
Even with the restrictions, Chinese citizens have been actually protesting the banks to gain access to their savings.
So far, the CCP is investigating, but no action has been taken.

Evergrande and other RE developer’s Ramifications

The economic ripple effects of Evergrande’s 300 Billion loan defaults and non-payment to local companies are causing a macroeconomic meltdown.

The result is reduced disposable income for the Chinese middle class and evaporating investing capital.
Evergrande is NOT the only company in trouble.
“Evergrande is the tip of the iceberg, and China is the Titanic,” says one economic analyst.
Bond losses from investment companies worldwide will cause capital interest rates to rise to further fuel inflation.

Local Governments and Municipalities in China are broke.

Most local Chinese governments rely on real estate sales to generate 30% to 40% of their annual budgets.
Local governments fund 90% of all infrastructure construction in China. With limited funds, this build will nearly stop.
The massive flood in the past two years will require massive infrastructure replacement. It is unclear where this funding will come from.

Government Take Over of Alibaba

In 2021, the CCP essentially took over Alibaba (the Chinese equitant of Amazon)
Jack Ma was forced out and unofficially replaced by CCP bureaucrats.
This is a business risk that must be considered by investors when investing in China.

Coal, Iron Ore, and Oil

The rolling electricity blackout is said to be a straw that started the mass exodus of foreign investment in new western manufacturing plants on the Chinese mainland. The extra cost of manufacturing delays made the plants no longer cost-effective, in addition to the issues above.
The CCP has made a deal with Russia to purchase the oil withheld from Europe.
Since China has exhausted much of its coal mining reserves, Australia is the nearest source.
Ire Ore is also needed to make steel which has been a primary export for the PRC for decades. Coal is also needed to melt the ire ore.
However, the CCP banned Australian products, including coal, over Australian comments about the origins of COVID.
China has just over 1,100 coal plants to generate electricity. It will take years to convert a percentage of these plants to oil-burning plants.

Rare Earth Metals in China and Australia

The Chinese mainland still has the bulk of the rare earth metals needed to manufacture electric cars, cell phones, computer chips, and wind turbines. This is a significant economic supply chain risk to the west and may get worse. These commodities can be weaponized by the CCP, thus creating an opportunity for investors.

The rare earth metals needed for “green energy” are cobalt, tungsten, copper, nickel, magnesium, lithium, and graphite.
Australia and Tasmania are opening new mines to compete with China in the rare earth metal markets.

“Capital Flight” In China

With all of the economic and supply chain issues above, many manufacturing companies are considering reducing their investments in mainland China to reduce business risk and avoid higher costs.

The current Chinese existing macroeconomic problems outlined above are causing an internal tightening of capital for manufacturing raw materials and the production of the raw materials into sub-parts or finished goods.
Now many, not all, bond investors and capital markets investors are not as trusting of the CCP as before. The risk analysis has changed.

The South China Sea Supply Chain

If a shooting war starts in the South China Sea or the invasion of Taiwan, most of the commercial shipping in the region may stop.
A shooting war will further damage the worldwide supply chain.

China’s Zero COVID Policy MacroEconomic and Worldwide Supply Chain FallOut

To keep the mad Chinese workers and middle class from protesting on the streets and before the election, it has been said that “the CCP has enforced a Zero COVID Policy to quarantine a percentage of the Chinese population.” The results in the:

Stoppages or reductions of a percentage of manufacturing
Increased supply chain issues and shortages worldwide
The young Chinese are unemployed and workers unpaid workers to further slow microeconomics in China
More defaults by Chinese Workers and Chinese companies
With the Chinese workers not buying consumer goods, this affects worldwide cargo shipping because now cargo ships or forced to sail to China empty and pay the higher price for diesel fuel. Further increasing worldwide inflation.
With many Chinese workers quarantined at home, there is less chance for widespread protests by the Chinese population before the election.

In Summary

Investors find your niches to take advantage of and leverage them when you can. Good investing.

Click Here to view the ranked list.

Is the Real Estate Crisis over in China? Not so fast.