CHINA Hits the Wall

Hi, welcome back to the channel. In today's episode, I want to talk to you about what's happening in the Chinese economy because we've just got the latest data for industrial production and retail sales, and they are the worst that China has seen since August 2024. So that's 14 months. And this represents a serious problem for China because industrial production is basically what China does. It makes things and then exports most of those things around the world and sells some of those things to Chinese consumers. But when industrial production is contracting, that tells us that there are fundamental issues going on right now in China. If we have a look at this chart, it shows the movement in both industrial production and retail sales in China dating back to 2023. And the scale on the left hand side of this chart shows the percentage increase year on year. And if we look at what's been going on in 2025, you can see that the start of the year, things were actually going quite well. The orange line shows industrial production. You can see that in February, it got up to almost 8% year on year growth and similar for retail sales, it was up by almost 6%. And if you look at the trend between the middle of 2024 and the early part of 2025, it was predominantly upward. So things were going in the right direction from China's perspective. But if you look at what's happened in the second half of 2025, things have been going seriously south. So industrial production has fallen from that high at the start of the year of around 8% to the latest figures, which show that year on year, it's only up by 4.9%. And as I mentioned, that's the worst increase that China has seen since August 24. Now, you might be thinking, well, 4.9% increase year on year, that seems pretty healthy in terms of the output. Well, it is relatively, if you're looking at it just in isolation, 4.9% is reasonable growth, but not for an economy like China, where they've built in 5% year on year growth every single year, just to achieve the figures that they need to, to be able to cover all of their costs. But also the biggest worry here is the trend. And the whole point of showing a graph is to look at the trends. And if you look at the trend in 2025, you can see that it's significantly downward. And particularly, over the last couple of months, we've seen a sharp downturn. And if that trend continues, let's face it, it's very likely that things are going to get worse for China, because they're facing a whole barrage of tariffs in the USA that have been introduced by Donald Trump. But also, they've got similar issues in lots of other economies like the European Union, where they've decided that China has been subsidizing a lot of its industry and therefore is selling at too low a price to be able to be a genuine real deal price. So those economies are now adding tariffs to try to level the competition for local producers. So the trend isn't good. And 4.9% growth actually for China isn't a great outcome. But if we look at retail sales, the situation is actually worse. So it's a very similar trend between the middle of 2024 and the start of 2025. We had this upward swing in year on year growth. But since May, we have seen a huge reduction from 6% year on year growth to the latest figure of 2.9% growth, which is the worst since August 24 as well. And the trend here is showing that we could see retail sales growth grinding to a halt in China. And that's a problem because, as we've discussed before, the two options that Chinese companies have when they're making things either are to export them or to sell them in China. So really, you need one of those markets to be going well. But what this chart shows us is that production is down and retail sales in China are weakening. And this is a major problem because producer prices for a lot of Chinese companies are going down. In fact, if we look at this chart, which shows producer prices over the past 12 months, you can see that they have been falling in every single month. And the latest data for October shows that they were down by 2.1%. So what that means is that Chinese companies on average are selling their products today for 2.1% less than they were this time last year. And that's an issue because all of their costs have gone up. So they're paying more for their raw materials, they're paying more for their wages, they're paying more for their rent and their fuel. So when your costs are going up, but your prices are going down, that means that your profit margin is being squeezed. And this isn't a recent phenomenon. If we expand the scale of this chart to show the last three years, you can see that producer prices have fallen in every single one of the past 36 months. And what that means is that this becomes cumulative because if your price fell by 10% two years ago, and then another 10% last year, and then another 10% this year, then when you add all of that together, it's an absolute nightmare. And that's exactly what's happening in China, not falling by 10%. Obviously, I just gave that as an example. But they have been falling by more than 2% on average. So year on year, Chinese businesses are seeing their profit margins being chipped away. And I recently have made a video talking about the fact that more than 50% of Chinese businesses are now making losses. And that's not sustainable. If you run a business and you're making losses, the only way that you can keep your business alive is by borrowing money or using cash that you've built up from previous profitability. But as you can see here, there hasn't been a lot of previous profitability. This has been a big problem in China for a long period of time. Now, car sales have been one of the bright spots in terms of the Chinese economy over the past few years. But interestingly, car sales are now starting to weaken as well. Car sales in October fell for the first time in eight months. And this is an indication of the major problems that are now building in China, because big ticket purchases like a new car are one of the first things that people pull back on when they're facing economic challenges. So if you think about it in your own context, if you're not sure what's going to be happening with your job, or you didn't get the pay rise that you wanted, or some expense has started to take more money out of your monthly budget, then you would think twice about renewing your car, buying a new one, you just think, well, I'll just hold on to the one that I've got for another year or so I can make do it's fine. I don't really need a new car. And that's what's happening in China. And interestingly, electric car sales, which have actually overtaken traditional sales, it's around about 56% electric in China at the moment around 44% traditional cars in terms of the new sales mix. They also fell in October. So we are seeing the momentum starting to run out in China in terms of retail demand. But it's not just the home market where China is struggling. It's also struggling with regards to exports. This chart shows the year on year movement in China's exports. And you can see that in October, exports fell by 1%. And that was the first time in the last 12 months that China's seen an actual fall in exports, apart from in February, which was the month after Donald Trump took over as the president of the USA. And obviously, there was a lot of uncertainty as to what was going on with regards to all of the tariffs that were being applied against Chinese goods. So when China has falling exports, that's bad news. And if we look at what's happening with imports, you can also see that there was a significant slowdown to 1% year on year growth in October. And the reason why imports are important is because a lot of Chinese businesses are importing raw materials, which they then use in their manufacturing processes before sending off the finished goods all around the world. So when the level of imports falls, it tells us that companies are pulling back on their purchases. They're not gearing up for a major boost to the year end numbers. In fact, it's quite the opposite. I think it's likely that we'll see a further slowdown. And of course, one of the fundamental problems with the Chinese economy that we've is what's going on in the property market. Because in the first 20 years of this century, we saw the property market really providing a huge boost to the Chinese economy. Everybody was running around buying property. There were huge property development companies building new cities all across China. And it was a win-win for everybody. But unfortunately, it's been a lose-lose for the last few years. And this chart shows the year on year change in house prices and also the month on month change in house prices dating back to 2020. And you can see that back in 2020, and to a certain extent in 2021, things were still going quite well. But that was the time when the Chinese authorities brought in the three red lines, which were basically rules that stopped property developers from taking on too much debt. Most of those property developers bailed those three red line tests and so therefore were not able to continue accessing huge amounts of capital from the banks. And then a lot of them got into difficulty and started going bankrupt. And at that time, the blue line crossed over the zero line here. So we started to see house prices falling in China. And that's been the situation since the start of 2022. And you can see that in 2024, things got really bad. We saw house prices falling year on year by around 6% towards the end of 2024. Things have improved a little bit, but we're still seeing year on year falls in house prices. And similar to what we talked about for producer prices, this has a cumulative impact because if prices fell by 2% last year, and then they fall by another 2% this year, then roughly speaking, they're down by 4% over the last two years. And when you compare that to what's happening in many other markets around the world, we've seen significant growth in house prices over the past few years. So China is operating in a very different environment, mainly because firstly, there was an oversupply of property. So there were too much new property being built. And therefore a lot of people were buying their property for investment purposes, because they thought the prices would only ever go up. And so this was a good way of making money, you bought a property, it went up in value, and you felt more wealthy. But unfortunately, the opposite happens when prices fall. And that's what's been happening over the past few years. And that's why consumers in China have lost their appetite for property. Because if you buy property, and then it goes down in value, the last thing that you would want to do is buy another property, there's absolutely no way you'd want to because you'd be nursing your losses. And unfortunately, that combined with the failure of a lot of the big property developers like Evergrande has meant that nobody really has a lot of confidence in the market. And you can see that month on month, for the past two or three years, we've seen monthly falls in prices. And that doesn't encourage you to buy a property. If you're thinking about buying a property, and you see that prices are going down every single month, then you'll probably just wait, you wait for the market to bottom out. But the market hasn't bottomed out, and it's unlikely to. And the reason why I'm showing you this chart is because in the first 20 years of the century, the economy was being boosted by the property market. Unfortunately, it's now being dragged down by it. And a lot of people who bought property are very unhappy because their life savings have basically gone up in smoke. So this is one of the drag factors that's reducing retail sales and causing people in China to be more cautious, which is obviously having a devastating impact on Chinese business. So what's the summary and conclusion today? Well, I wanted to post this video because clearly we've been talking about China for a long period of time. And so whenever the latest data comes out, I always want to give you an update. What we've seen in today's video is that industrial output, which tells us basically how much Chinese businesses are producing, how many goods they've actually made for either export or their home market, that is now slowing down significantly. The year on year growth is the lowest that's been seen in since August of last year. So for 14 months. And that tells us that there are problems. And combined with that, we've seen a slowdown in retail sales. So Chinese consumers are not increasing the amount they're spending by as much as they were historically. This is also the slowest rate of growth that's been seen in China since August 24. So things are going on in China right now that are going to have fundamental repercussions for Chinese businesses and the economy. What we've also seen in today's video is that even markets such as the new car market, which has really been bolstering the Chinese economy over the last few years, has started to slow down. It's actually seen the lowest level of growth for eight months. So that tells us that there are issues going on in China. But there's also problems with regards to the export markets. We've talked about this a lot with regards to the biggest single market that China exports into the USA. There are now a lot more tariffs on Chinese goods. So we have the 30 percent tariff that was announced initially. Then it went up to over 100 percent. And it's still moving around. Nobody really knows exactly what those tariffs are because it changes almost on a weekly basis. But that uncertainty is causing major problems for Chinese businesses because it's increasing the price of their goods immediately. But it's also meaning that businesses in the USA are now looking for alternative options. So rather than buying from China, they're buying from elsewhere because you just don't know what might happen if Donald Trump suddenly decides that he doesn't like China again and he's going to increase the tariff to 100 percent. If you're a business in the USA and you're sourcing all of your product from China, that's absolutely devastating. So a lot of businesses are now changing their supply chains. They're trying to source things within the USA or from other countries that don't have as high a tariff as China. So this is having a long term impact on China's exports. But it's not just the USA undertaking these sorts of deals. In Europe, we've also seen tariffs being applied against firstly Chinese cars and then lots of other different types of imports. So China is facing real hurdles with regards to maintaining the amount of business that it's doing with the rest of the world. And that's having an impact on Chinese businesses. They're seeing a slowdown in demand. But more importantly, we're seeing producer prices crashing in China. Over the past three years, Chinese businesses have seen a constant erosion in their prices. They're selling things today at significantly lower prices than they were three years ago. And that's a problem because their costs are going up. So profit margins have been squeezed and over 50 percent of businesses in China are now banking losses. Now, that is not sustainable because the only way you can fund that is basically borrowing from the banks. So all these companies are taking on more and more debt at a time when they're not liquid. They're not solvent because if you're making losses, you can't even cover the interest on your loans, never mind paying back your loans. So China is holding on, hoping that things turn around. But when you look at the prospects, it doesn't look like it's going to do it anytime soon because things are getting more difficult internationally and the home market is still struggling. Now, we haven't talked about deflation today, but China has been struggling with deflation across the board in terms of prices are struggling to increase. And until China breaks out of that cycle, then producer prices won't go up. When you look at what happened in Japan, they were in a deflationary cycle for around 10 years. So this could prove to be a major issue long term for China, which could have really devastating impacts on the Chinese economy. So it will be fascinating to see what happens in the rest of 2025, because hitting that growth target of 5% GDP that China has set for every single one of the last few years is now looking very unlikely. So hopefully you've enjoyed today's video, you found it useful, informative and thought provoking. If you have liked what I've said, then please give me a thumbs up. Please subscribe if you haven't done so already. And thank you so much to everyone that supported me. If you bought me a coffee or sent me YouTube super thanks or signed up as a YouTube member, a Patreon or buy me coffee member. Thank you for that support, really appreciate it. And here's something about a smile on your face.