The Iran War Is Starting to Expose Cracks in China’s Economy

• China’s strategic reserves of oil and natural gas have insulated it somewhat, but its manufacturing-based economy is beginning to falter. China has sought to increase exports as demand has weakened at home. Rising oil and natural gas prices from the war in Iran are beginning to weigh on the Chinese economy, further slowing already anaemic consumer spending and hurting critical export sectors.
• Car sales fell in March and plunged further in April. Restaurants and hotels are also seeing fewer customers as households turn cautious. In southern China, thousands of toy factory workers protested last week after their employer collapsed under rising plastic costs and ongoing tariffs in the United States (U.S.).
• The emerging signs of strain underscore how even China, with vast strategic oil reserves and massive investments in renewable energy, is not immune to the forces pressuring economies worldwide. For many weeks, China had appeared to weather the fallout from the war, a view reinforced by fairly strong economic data through March. But with the war in its ninth week with no clear end, cracks are beginning to show.
• “The economy is decelerating,” said Alicia García-Herrero, chief economist for Asia Pacific at Natixis, a French financial firm. China may struggle to meet this year’s growth target of 4.5% or more, she added. One of the clearest signs of emerging weakness is in car sales and production, often considered early indicators of trouble. Cars are the second-largest purchase for many Chinese households after apartments, and the industry drives demand for steel, glass and other materials.
• China’s retail car sales plunged 26% in the first 19 days of April from a year earlier, according to the China Passenger Car Association. While part of the drop reflects weaker electric-vehicle sales after tax incentives expired in December, gasoline-powered cars fared worse, falling by nearly 40%. Falling sales have left dealership lots crowded with unsold cars, triggering production cutbacks. Chinese car factories made 27% fewer cars in the first two weeks of April than a year earlier, a sharp pullback even as exports rise.
• At first glance, the economy still looks resilient. But a closer look suggests underlying weakness. This month, China said that its economy grew at an annualised rate of 5.3% during the first three months of this year. But most of the strength was in January and February. Retail sales decelerated in March, rising just 1.7% from a year ago. The China Federation of Logistics and Purchasing also noted that inventories of unsold goods continued to build. Michael Pettis, a Beijing economist, expressed that rising inventories could drag on future growth.

(Source: The New York Times)