As the Iran war drags on, a slowdown in China's economy—expected to feel the most direct impact because of its high dependence on Iranian crude—is becoming visible. With energy prices surging, already weak consumption is contracting further.
On the 27th, The New York Times (NYT) reported, "As the war, now in its ninth week, shows no sign of ending, cracks have begun to appear in China's economy," adding, "The latest economic indicators show that despite its massive strategic petroleum reserves and investment in renewable energy, China is not free from the same pressures weighing on the global economy."
China appeared relatively less affected than other Asian countries in the early days of the war because it holds large strategic oil reserves and refining capacity. The government has also focused on curbing inflation by limiting state oil corporations to pass only half of the increase in crude prices on to consumers.
But signs that cracks are forming in China's economy have already emerged. According to the China Passenger Car Association, retail auto sales from Apr. 1–19 plunged 26% from a year earlier. While the expiration of electric-vehicle tax incentives in Dec. last year played a part, gasoline vehicle sales fell by nearly 40%, an even steeper drop. Automobiles are the second-largest consumer purchase for Chinese households after dwellings and drive demand across industries such as steel and glass.
With demand for new cars falling, unsold vehicles are piling up at dealerships, leading to production cuts. Chinese auto plants produced 27% fewer vehicles in the first two weeks of Apr. than a year earlier, a sharp decline even as exports are rising, the NYT said.
The situation in the toy industry is even more severe. As prices for plastics—made from oil and natural gas—have surged, factories have been going bankrupt in quick succession recently in Yulin, a low-wage toy manufacturing hub in southern China. Thousands of workers who lost their jobs are holding daily protests demanding unpaid wages and compensation.
The bankrupt factories belong to Hong Kong-based corporations Wah Shing Toys. A subsidiary, in a statement announcing the plant closures and bankruptcy filings, cited in recent years the "escalation of trade tensions between China and the United States" and a worsening overseas business environment, and said overseas customers' unpaid bills had hit cash flow.
In particular, because China produces one-third of the world's toys, the impact of soaring plastic prices is expected to spread across related manufacturing. After the outbreak of the Iran war, the Shantou Chenghai Toy Association warned that a surge in plastic prices was triggering "hoarding and panic."
With multiple economic warning signs appearing at once, achieving this year's growth target has become uncertain. The Chinese government set this year's gross domestic product (GDP) growth target at 4.5% to 5%. China announced that first-quarter economic growth was at an annual rate of 5.3%, but most of the momentum was concentrated in Jan. and Feb. In particular, retail sales in Mar. rose only 1.7% from a year earlier.
Alicia García-Herrero, chief Asia-Pacific economist at French financial company Natixis, said the Chinese economy is slowing and projected it may be difficult to achieve growth above 4.5% this year. Peking University economist Michael Pettis also noted that rising inventories could weigh on China's future economic growth.