China and Russia’s Economies Face Unraveling Amid Debt Crises and Falling Exports
August 17, 2023
The Unraveling Economies of Beijing and Moscow
Just a year ago, Beijing and Moscow were heralding a new world order. However, it appears their economies are unravelling at a faster pace than anticipated. In China, exports, manufacturing activities, and property prices are all heading downwards. The government has even decided to halt the publication of the country’s increasingly alarming youth unemployment rate. Meanwhile, a burgeoning debt crisis and a deflationary spiral are major threats to economic growth. In Russia, a significant decline in commodity-based export revenues coupled with substantial military expenditures are placing a strain on the already sanctioned economy. This has led to the ruble dropping beyond the psychologically significant level of 100 to the dollar, marking a year-to-date fall of 37%.
Diverging Central Bank Policies
Despite the disheartening economic landscape, these countries are taking different measures to manage their challenges. On Tuesday, in an attempt to stimulate its economy, China slashed various key interest rates, with the hope of sparking growth and investment. This action follows the inability of Country Garden Holdings (OTCPK:CTRYF) – one of China’s biggest real estate developers – to meet its payments, impacting a sector that contributes to a quarter of the entire economic activity. On the other hand, due to concerns of inflationary pressures spreading through the economy, Russia’s central bank increased rates by 3.5 percentage points in an emergency meeting, raising the key rate to 12%.
Impacts on Multinationals
As several Western companies have already withdrawn or are attempting to exit Russia, investors are keenly observing the effects on multinationals operating in China. Recent earnings calls from industry participants reveal mounting challenges, with warnings from industry titans like Caterpillar (CAT), Danaher (DHR), Dow Inc. (DOW), DuPont (DD), LyondellBasell (LYB) and Parker Hannifin (PH). Andrew Hecht, the Group Leader of SA Investing, remarked that a potential positive shift in U.S.-Chinese relations could elevate Chinese stocks. However, the markets are currently mirroring the existing economic and geopolitical scenarios.
A Glimpse into the Future
The grim forecast suggests China might fall short of reaching its annual GDP growth target of 5% this year, as it struggles with its economic challenges. The most pressing concern is the fear of a growing financial contagion, coupled with debt issues that extend from local governments to the central administration. A reduction in domestic demand could result in tax revenue shortfalls, while a weak financial status could impede Beijing’s fiscal policy instruments designed to bolster the economy.