China's currency slide, mounting debt present challenges to seafood industry
This week, for the first time in over a decade, China’s currency fell below the psychologically important exchange rate of CNY 7.00 (USD 1.00, EUR 0.89) per U.S. dollar.
The news-making milestone will add to the pessimism in many Chinese boardrooms this summer over the long-term prospects for the country’s economy as the dispute between China and its largest customer – the United States – continues.
The China-U.S. trade war intensified over the past week, with U.S. President Donald Trump placing a 10 percent tariff on the remaining USD 300 billion (EUR 270 billion) of Chinese goods that were previously exempt, and China responding by devaluing its currency, the yuan, in an effort to bolster its own economy and punish the U.S.
The trade war is already having an impact on China – the country’s gross domestic product (GDP) figure of 6.2 percent in the second quarter represents its slowest quarterly growth for three decades. Economic analysts are predicting it will fall further – down to six percent for 2019 – down from 6.9 percent in 2017 and 7.9 percent in 2013.
And the deceleration is likely to continue as China’s ability to respond is limited by its high levels of debt. Corporate debt in China sits at USD 20 trillion (EUR 17.9 trillion), according to a December 2018 estimate by the Bank for International Settlements. As a result, Chinese citizens are likely to spend less in coming years, particularly in the context of weaker growth and downward pressure on the Chinese currency.
Regardless, there’s plenty of optimism to be gleaned from China’s seafood import data, as import figures for the first half of the year are way up in 2019. As just one example, the port of Shanghai just recorded imports of 430 tons of Russian king crab in the first six months of this year, up 687 percent year-on-year. But the official data can be misleading, as a crackdown on smuggling is driving the official figures upwards.
The broader Chinese economic picture, however, is less rosy. Annual salary increases, which had been in the double-digit growth a few years ago, have since slipped into the low single-digits. Consumption contributed 3.79 percent of GDP growth in the second quarter of 2019, compared to 4.17 percent in the first quarter. And an increasing reliance on debt to pay for higher house prices is furthering a vicious cycle.
Nevertheless, China’s central government has set a GDP growth goal of 6 percent in 2019 – the 60th anniversary of the founding of the People’s Republic. That will require unleashing further credit, rather that curbing credit growth and home-buying to address debt overhangs. Those type of short-term political targets may just be simply delaying an inevitable deleveraging, and increase mortgage payments for consumers who might otherwise spend on dining or seafood purchases.
There are other economic storm-clouds on the horizon. Outside of seafood and other foodstuffs, China’s exports have wobbled, with exports contributing 1.3 percent of GDP growth in Q2, versus 1.46 percent in the first quarter of the year. In 2018, China’s auto sales fell for the first time on record. Market leaders Volkswagen and General Motors have seen their sales fall by 10 percent and 27 percent, respectively, in the first half of 2019. All of this is putting pressure on the yuan.
Crucially, the old ways China has employed to drive growth no longer necessarily work due to the country’s large stock of government and corporate debt. Fiscal stimuli, in the form of big public works spending, is less feasible given debt accumulated from previous stimulus programs.
The recent collapse of Baoshang Bank, a smaller regional lender with exposure to private companies, including seafood processors, suggests government may be getting ready to abandon its “implicit guarantee” – a policy that the government will bail out any ailing bank. Such a move would drastically reduce the risk appetite of banks in their lending to corporate entities, many of which have also operated on the premise that government will ultimately bail them and/or their lender out to prevent the social unrest that comes with mass factory closures.
Meanwhile, USD 6.8 trillion (EUR 6.1 trillion) build-up of personal debt in China to pay for dwellings, which cost up to 25 times average family incomes in Beijing and Shanghai, has in turn accentuated a debt crisis in those two major cities. Any sharp drop in real estate prices would likely trigger a financial crisis and set the whole economy backwards.
There are other issues raising alarm bells in China, like the shrinking of the current account surplus, which is set to go into negative territory this year. China has a rapidly aging population, which is upending China’s previously formidable savings-investment ratio. And the sluggish state of China’s producer price index (PPI) in recent months suggests a contraction, or at least a fatigue, in the industrial sector. Both the official and the Caixin PMI were below the key threshold of 50 for June.
All this points to continued pressure on the yuan, which has slipped in value from USD 0.16 (EUR 0.14) in March to USD 0.14 (EUR 0.12) currently as uncertainty over Sino-U.S. trade talks clouds sentiment and confidence. Imports were down 3.9 percent in the first quarter of 2019, though imports of foodstuffs, including pork and seafood, don’t appear as badly impacted as consumer goods, luxuries, or ores.
China’s economy is entering a new phase as it matures. Gone are the days of vertiginous growth. And with a weaker currency, there’s bound to be more headwinds ahead – and those may sweep up the global seafood industry.
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