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CHINA’S ECONOMY RETURNS TO GROWTH IN JUNE
After contracting for three consecutive months, China’s economy grew modestly in June.
The country’s official purchasing managers index (PMI) for the services sector grew to 54.7 last month from 47.8 in May as China lifted its three-month anti-COVID lockdown of more than 325 million people in 46 metro areas.
Ratings above 50 indicate growth.
The reading was the highest since May 2021.
The manufacturing sector’s PMI edged up from 49.6 in May to 50.2 in June, less than the 50.5 expected by analysts polled by The Wall Street Journal but still moving into positive territory.
However, export orders were weak because of slacking global demand, the WSJ noted.
Because the world’s economy is slowing, China can no longer rely on exports to buoy its GDP.
Instead, Beijing will borrow the equivalent of $44.8 billion to fund a major infrastructure spending spree, the WSJ noted.
Local governments already have borrowed ten times that amount so far this year for their own building projects, according to the WSJ.
Urban unemployment rose to 5.9 percent in May, slightly higher than the government’s 5.5-percent target. Joblessness among those 16 to 24 years of age set a record at 18.9 percent.
TREND FORECAST: Beijing’s three-month anti-COVID shutdown and the flagging global economy have foiled president Xi Jinping’s vision of a dual-circulation economy, in which domestic consumer spending and manufactured exports can spell each other if one of the two sectors weakens.
Instead, both sectors are losing steam.
As a result, China is falling back on infrastructure spending, as it did before.
Massive government projects have been China’s equivalent of central banks buying bonds—a way to keep an economy going through its motions while supply and demand regain their equilibrium.
The looming global recession and China’s return to relying on the public sector to sustain economic activity will delay by years the country’s emergence as the world’s largest economy.
More Downward Proof
Chinese businesses have cut back on advertising amid continued weak consumer spending, the threat of additional government anti-virus lockdowns, and a slowing national and world economy.
Ad spending in April was 20 percent less than a year earlier, according to CTR Market Research. That followed a 13-percent slump in March as much of China was shut down to contain the spread of the COVID virus.
China’s $150-billion market for online ads will grow about 8 percent this year, compared to more than 25 percent in each of 2020 and 2021, Goldman Sachs Equity Research predicted.
Tencent, whose Wechat social media app is used by more than a billion Chinese, reported ad revenues fell dramatically in the second quarter.
The company’s first-quarter ad sales already had plunged 18 percent after Beijing cracked down on gaming, private tutoring, and other industries that were mainstays of Wechat’s balance sheet.
MORE CENTRAL BANKS ADD CHINA’S RENMINBI TO CURRENCY RESERVES
The proportion of central banks adding China’s renminbi currency to their foreign-exchange reserves has grown from 81 percent last year to 85 percent now, according to a UBS survey of 30 of the world’s leading national banks.
The dollar made up 65 percent of central banks’ foreign currency reserves on 31 March, 2015, but now has fallen below 60 percent, the survey found.
However, the renminbi accounts for only 3 percent.
Still, “we’re seeing a gradual erosion of the dollar,” UBS strategist Massamiliano Castelli told the Financial Times.
“The picture that emerges is one of a multipolar currency system,” he noted.
Central banks’ growing interest in the renminbi stems from Western sanctions against Russia because of its war on Ukraine, analysts explained to the FT.
Western allies have frozen roughly $300 billion in Russian assets, about half its foreign currency reserves, according to the FT.
The world seems to be dividing into camps that support the sanctions and those that do not, including China.
Should future conflicts involve sanctions against other countries and subsequent financial reprisals, central banks want to be hedged, the analysts said.
A shift to a multipolar currency system would benefit the renminbi, according to about 80 percent of central bankers responding to the USB survey. Less than half thought it would be good for the dollar.
The U.S.’s high inflation rate and the U.S. Federal Reserve’s aggressive plan to boost interest rates also has clouded the dollar recently, the FT said.
Almost half of survey respondents said their portfolios are more diverse now than a year ago, including equities, “green” debt, and inflation-protected bonds.
Sixty-two percent of central bankers surveyed have added dollars to their reserves this year; 54 percent have bought more renminbi.
TREND FORECAST: The business of America over the past century has been War. History is repeating itself. In the ten years following World War I, the British pound sterling was dethroned as the global reserve currency because of the financial damage the war inflicted on the nation.
The same is true for the United States, which just passed another record-breaking defense budget. Thus, while the dollar is currently strong, we maintain our forecast that when China overtakes the U.S. as the world’s #1 economy in the next several years, it will begin the trend of overtaking the dollar as the world’s reserve currency.
Also, the dollar’s strength relates to the Federal Reserve raising interest rates while other major economies such as the EU and Japan still keep the rates low. Thus, the reason it has not fallen sharply is that there is, at this time, no global competition considering that the euro, its main competitor, has hit a 20 year low against the dollar and the Eurozone economy remains weak.