Skip to content

CFDs are complex financial instruments and come with a high risk of losing money rapidly due to leverage. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money. CFDs are complex financial instruments and come with a high risk of losing money rapidly due to leverage. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money.

China's Economic Turmoil: What Went Wrong?

The narrative of China's economy has never shifted so swiftly before — moving from reopening optimism to recovery doubts, and now to an impending crisis, all in merely eight months' time. Where did things go wrong?

Source: Bloomberg

China's economic data: insights and trends

China released its second set of economic data for July on August 15th, covering industrial production, the unemployment rate, retail sales and fixed asset investment. Following the trend of the previous month, the majority of these indicators failed to meet estimates (refer to the chart below). Furthermore, China also declared a suspension in the publication of youth job unemployment figures, which had climbed to a record high of 21.3% in June 2023.

July 2023 Actual Forecast
Retail Sales YoY 2.5% 4.6%
Industrial Production YoY 3.7% 4.7%
Unemployment Rate 5.3% 5.2%
Fixed Asset Investment YoY 3.4% 3.4%

In the preceding week, China's Consumer Price Index (CPI) for July registered its first decline since the reopening period, marking the lowest figure since 2021.

China's trade figures follow a similar trend. In July, the country's exports plummeted by 14.5% compared to the previous year, accompanied by a 12.4% decline in imports during the same month. The contraction in export volume is expected to result in decreased production, while the dip in imports underscores a decrease in domestic demand.

All of these elements are poised to present challenges to China's ongoing recovery trajectory.

What type of crisis might be in store?

Overall, the broad-based decline mentioned above highlights the mounting pressures on the world’s second-largest economy as it grapples with the task of reinvigorating domestic demand and restoring confidence in the business sector amid a faltering post-pandemic recovery. This situation not only poses a serious threat to the annual growth rate target for 2023 but also gives rise to deep concerns over its long-term outlook.

To make matters worse, new crises are surfacing. China’s largest private developer Country Garden is reported to be on the brink of a 3.9 billion yuan default and has suspended trading on its 11 onshore bonds. Alongside the potential property crisis, a financial crisis looms. Zhongzhi Enterprise, one of China's financial giants with exposure to trust companies, has confirmed missing payments on several high-yield investment products, sparking contagion risk within the industry."

What went wrong?

No crisis is constructed overnight. In fact, many of the challenges encountered by the Chinese economy are already rooted before 2023.

On one hand, the stringent pandemic policies enforced for more than two years have notably eroded economic health and hindered the engine of economic growth. For instance, the non-transparent and rapidly changing policy environment prompted numerous global enterprises to exit China. As of June 2023, a survey conducted by the European Union Chamber of Commerce in China revealed that 23 percent of Western companies were considering relocating their operations from China. This trend has already inflicted enduring damage on China’s manufacturing sector and partially explains the sharp drop in China’s recent exports.

On the other hand, the psychological scars left by the pandemic have not only failed to heal but have worsened in the aftermath, exacerbated by Beijing's reluctance to provide additional support after exiting the Covid-zero policy earlier this year. This is evident in the extremely fragile consumer confidence and the substantial decline in investment sentiment.

Moreover, there's a context we shouldn't overlook: starting in 2020, the Chinese government's crackdown on industries spanning technology, real estate, and education has left the economy limping forward. Initially, these clampdowns might have led to isolated downturns in each sector, but as more chemical interactions are generated between them, broader and more intricate ramifications become inevitable. The recent resurgence of property and financial crises serves as a distinct manifestation of this interconnectedness."

The Chinese yuan retreats to pandemic lows

Amid mounting pressure, China's central bank, the PBOC, unexpectedly cut a key interest rate by 15 basis points, the most significant cut since 2020.

Consequently, China's 10-year yield dropped to 2.56%, the lowest level since 2020, and the Chinese Yuan also dipped to its lowest point since November 2022.

Looking at the daily chart of USD/CNH, it appears that PBOC's cut this week has paved the way for the pair to surpass the recent June high, with the last October high (also a 16-year-high) above 7.36 only a step away.

This information has been prepared by IG, a trading name of IG Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.
CFDs are a leveraged products. CFD trading may not be suitable for everyone and can result in losses that exceed your initial deposit, so please ensure that you fully understand the risks involved.

Start trading forex today

Find opportunity on the world’s most-traded – and most-volatile – financial market

  • Trade spreads from just 0.6 points on EUR/USD
  • Analyse with clear, fast charts
  • Speculate wherever you are with our intuitive mobile apps

See an FX opportunity?

Try a risk-free trade in your demo account, and see whether you’re onto something.

  • Log in to your demo
  • Try a risk-free trade
  • See whether your hunch pays off

See an FX opportunity?

Don’t miss your chance – upgrade to a live account to take advantage.

  • Get spreads from just 0.6 points on popular pairs
  • Analyse and deal seamlessly on fast, intuitive charts
  • See and react to breaking news in-platform

See an FX opportunity?

Don’t miss your chance. Log in to take your position.

Live prices on most popular markets

  • Forex
  • Shares
  • Indices

Prices above are subject to our website terms and agreements. Prices are indicative only. All shares prices are delayed by at least 15 mins.

Plan your trading week

Get the week’s market-moving news sent directly to your inbox every Friday. The Week Ahead gives you a full calendar of upcoming economic events, as well as commentary from our expert analysts on the key markets to watch.

For more info on how we might use your data, see our privacy notice and access policy and privacy webpage.

You might be interested in…

Find out what charges your trades could incur with our transparent fee structure.

Discover why so many clients choose us, and what makes us a world-leading provider of CFDs.

Stay on top of upcoming market-moving events with our customisable economic calendar.