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China’s economic woes destabilize supply chains

China’s economy did not recover as robustly as expected after authorities lifted the country’s strict COVID-19 restrictions in early 2023. Despite a brief economic uptick following the reopening, the country’s economic recovery remains slow due to multiple factors, including a struggling property market, geopolitical tensions, and weak consumer spending in the domestic market.  

China’s manufacturing Purchasing Manager Index (PMI), an indicator reflecting trends in the manufacturing sector, has been below 50 since April 2023. The bar of 50 indicates no change of activities while readings below 50 refer to contractions, and the latest data signals continuous contractions of manufacturing activities in the second quarter of the year.  

However, improvement at a slow pace is reflected by the narrowing gap to 50 month-by-month from May to August. Nevertheless, the economic downturn has taken a toll on domestic supply chains by giving rise to a growing number of bankruptcies and factory strikes in China. 

Slowing demand and insolvencies 

Demand for products manufactured in China has decreased as domestic spending contracted, while international companies started to move away from the country amid persistent political tensions with the West. China’s August exports in U.S. dollar terms dropped by 8.8% year-on-year following an even steeper fall by 14.5% in July.  

International manufacturers are taking steps to suspend production or permanently cease operations at their Chinese branches due to international tensions China’s economic downturn.  

On July 14, profitability concerns forced GAC Mitsubishi Motors Co., Ltd. to indefinitely extend a production stoppage, which started on March 26, at its Changsha plant. By the end of September, Mitsubishi Motors announced that it will withdraw from automobile production in China completely amid a lack of demand for its products. Withdrawal negotiations with Guangzhou Automobile Group (GAC), the domestic automaker with which Mitsubishi has a joint venture, are already underway.  

Apple Inc.’s supplier Wistron Corporation announced the closure of its factory in Taizhou, Jiangsu on April 26 due to internal capacity restructuring. Japanese magnet maker Daido Electronics Co., Ltd. closed its factory in Suzhou as part of a strategic adjustment in September. Meanwhile, the U.S. ban on semiconductor exports to China caused Apple Inc. to end its contract with Yangtze Memory Technologies Co. (YMTC) in 2022.  

These stoppages and insolvencies have left major Chinese technology companies more reliant on domestic demand. This, in turn, resulted in Chinese entities being more vulnerable to operational disruptions during the latest economic downturn in China. 

In 2020, China’s central government announced the “Three Red Line” regulation to limit property developer borrowing caps. Moreover, consumer confidence in China faltered following economic turbulences throughout the pandemic. As a result, the China Evergrande Group, one of China’s biggest real estate companies, filed for bankruptcy protection in a Manhattan court on August 17, while Country Garden Holdings Company Limited, another key real estate company, narrowly avoided default by paying $22.5 million (€ 21.26 million) in bond coupons on September 6.  

On September 19, Sunac China Holdings Limited filed a petition for Chapter 15 protection with a U.S. Bankruptcy Court following the approval from its creditors to restructure nearly $10 billion (€94.47 million) worth of debt.  

Key economic indicators 

Decreasing demand caused housing starts, an economic indicator capturing the number of privately owned new houses on which construction has been started during a given period, to fall by 25% between January and July, lowering domestic demand for building materials. The property sector constitutes the largest driver of China’s economy, making up around 30% of the country’s GDP. Heavily indebted property developers are failing to pay their contractors, leading to liquidity crunches among companies from the construction and related sectors. This has given rise to more salary arrears, which has driven industrial protests.  

The China Labour Bulletin, a key data collector on labor unrest in China, has recorded a total of 989 strikes and protests over unpaid wages or compensation from January through August 2023, contrasting 830 cases throughout all of 2022. Most labor disputes were in the construction sector due to the dire conditions in the property market. However, automotive components, electronics, and garment manufacturers, mostly in Guangdong Province, a hub of textile, hardware, and electronics makers, have also been affected. For example, workers held protests at the site of Shenzhen Silver Basis Technology Co., Ltd., a precision mold manufacturer, for wage increments in late August. A similar action was taken at the factory of Countach Circuits Shenzhen Co., Ltd. in Shenzhen on the same day, requiring the printed circuit boards (PCBs) company to pay compensation arrears.  

Lastly, what’s further destabilized domestic supply chains is that considerably more Chinese companies from various manufacturing industries have entered bankruptcy proceedings since the start of 2023 amid lowered consumer confidence. Everstream Analytics has recorded 230 entities filing for bankruptcy in August alone, a twofold increase from December 2022 when COVID-19 restrictions remained effective in the country. Throughout the last nine months, companies from general machinery and material processing made up a large proportion of entities affected, followed by electronics, consumer goods, and automotive. In the first half of September, 130 bankruptcies have already been reported by Everstream Analytics, further underlining the general trends towards growing supplier instability since the beginning of the year.  

Everstream clients are receiving more detailed insights and recommendations about this risk. 

Contact us to learn how we can give you a complete view of the risks affecting your end-to-end supply chain and what you can do to mitigate them. 

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