But the real estate sector has been largely unfazed despite repeated efforts by the Chinese government and local governments to stimulate activity. July sales were down 29% from the previous year.
Late Monday night, the People’s Bank of China released a statement calling on banks to boost credit growth. But it remains to be seen how banks will facilitate lending to customers who don’t want to borrow.
China’s GDP growth target of 5.5% in 2022 is already buried. But as President Xi Jinping prepares for the Chinese Communist Party’s 20th National Congress in the coming months, his efforts to get the economy back on track have been devastating in southern China. Hampered by drought.
In addition to bringing extreme temperatures, the drought has cut power production from local hydroelectric plants, forcing power rationing in Sichuan province.
Although the region accounts for less than 5% of China’s economy, it has a population similar to that of Germany and is an important manufacturing hub for electric vehicle batteries and solar panels. Industrial users have already been forced to cut production, and it seems likely that these cuts will be long-lasting.
“Pay the price for our freedom”
About 8,000 kilometers away in Northern Europe, another energy crisis is forcing a reduction in industrial production. As European gas and electricity prices have surged in recent weeks, large energy users such as zinc and aluminum smelters have closed as losses mount.
Markets were caught off guard as Russia shut down a critical gas pipeline for ‘planned maintenance’ on Monday night, causing Russia to permanently stop gas flows and impose sanctions on Western nations. There was growing concern that the
Dutch benchmark European gas prices surged 13% on Monday night to reach an all-time high. That’s about 15 times the average price typical for this time of year. Coal prices soared, as did electricity prices in Germany and France and gas prices in the UK.
Citi gave a neat and frankly terrifying example of the impact of energy prices on household budgets, warning that UK inflation could reach nearly 18% in early 2023.
Perhaps most frighteningly, this new European energy crisis hits in August, just months before Europe’s winter, when energy use surges.
French President Emmanuel Macron has warned of the difficulties ahead in the coming months and urged his people to “accept a price for our freedoms and values,” said Prime Minister Olaf Scholz. There are signs of despair as we openly wonder what would happen if something like this happened. The flow of gas from Russia stops.
In Europe, winter can be expensive and unsettled. As JP Morgan boss Jamie Dimon told this column a few months ago, energy shortages could tear the European Union apart as individual countries fight to keep their lights and heat on in their own ways. I have.
A surge in internet searches for firewood in Germany may cause laughter, but social unrest is far from likely if energy costs continue to skyrocket and a sudden widespread contraction in industrial production causes commodity shortages. It seems not.
So how do these crises in China and Europe get to Australia?
China’s ripple effect is the most obvious. A slowdown in the real estate sector is already putting pressure on iron ore and other commodity prices. And the broader economic weakness hinted at by China’s recent rate cut doesn’t bode well for broader commodity demand.
Rising energy prices in Europe will have ripple effects around the world. US natural gas prices hit levels not seen in 2002 on Monday night, and Asian gas prices also jumped. Australian gas prices are also expected to come under pressure as export parity rises.
Thermal coal prices have been on the rise all year round and this trend is expected to continue as Europe (especially Germany) is reluctantly returning to coal.
These ripple effects have swings and detours – positive for oil and gas companies and negative for miners and electricity users. But the bigger question for investors is how much a deep recession in Europe and further weakness in the Chinese economy will weigh on global sentiment.
Even the most resilient domestic results can be overwhelmed by bad news from abroad.