China's Economic Slowdown Caused by Weak Domestic Demand

Last week, as global interest rates rose, Asian currencies showed extreme strength. The Korean won began its strong turnaround first, and the Chinese yuan also continued its strength, falling to the 6.7 level. The Japanese yen plummeted by about 10 yen from the 160-yen level to the 150-yen level, showing rapid exchange rate fluctuations across Asian currencies.

While it's too early to definitively say who has the upper hand, the US and China are fiercely competing for AI hegemony at the top.

China's annual growth target presented at the 'Two Sessions' in March this year was 4.5-5%. It recorded 5% in Q1, but the pace of growth slowed rapidly from Q2, with Q2 GDP falling to 4.3%. The cumulative growth rate for the first half was 4.7%, maintaining the midpoint of the target, but concerns are raised that achieving the annual target may be difficult if data disappoints in the second half.

Despite US sanctions, China's exports, surprisingly, showed a favorable trend. Total exports in August grew by 20% globally, with exports to the US in particular recording a growth rate of nearly 30% since Q2. This is attributed to the influx of goods to the US in preparation for year-end shopping events, and also because the US needed Chinese products to lower consumer prices.

The primary reason for China's overall economic slowdown, despite strong exports, lies in weak domestic demand. Consumption accounts for 60-65% of China's GDP, making the trend of domestic demand as influential on the overall economy as export performance. Analysis suggests that the impact of the domestic economy is greater than that of the US-China trade dispute.

Indeed, the sluggish domestic demand data is seen as supporting this public perception of the economy.

Policies were implemented without sufficient communication with the market, leading to concerns about serial bankruptcies.

In the Chinese economy, the corporate sector is increasing loans thanks to strong export performance, but the household sector shows a contrasting trend. Household loans, which are more closely tied to people's livelihoods, have turned negative this year. This suggests that households are prioritizing loan repayment over investment for their spare money, indicating a widening economic temperature gap between businesses and households.

It showed a commitment to activating not only advanced technology investments like AI but also the overall domestic economy, with actual signs of fund execution being detected.

Contrary to its budget plan at the beginning of the year, the Chinese government executed less fiscal spending in the first half compared to last year. In particular, the pace of spending drastically slowed from Q2, showing a negative fiscal expenditure in May-June.

Despite efforts to increase production since 2015-2016, reliance on raw material imports remains high.

In particular, the rapid rise in prices of all raw materials, including crude oil, from April to May, added pressure on the Chinese government's fiscal policy operations.

The official policy of avoiding military conflict unnecessarily created fears of an oil price surge to the levels of March-April. If oil prices remain stable, the Chinese government is expected to have room to expand fiscal spending in the second half.

China has been increasing crude oil purchases again since July, which suggests it assesses current oil price levels as low. This purchasing pattern may be linked to intensive fiscal fund execution in the remaining period.

Media reports indicated that Chinese state-owned enterprises purchased US soybeans ahead of the US-China summit. This is interpreted as a signal of China's willingness to engage in dialogue through soybean purchases. This summit is expected to focus on managing existing risks rather than fundamentally improving bilateral relations.

Both the United States and China are approaching AI from their respective national security perspectives, and it does not appear that they are seeking to establish global governance that considers the other party's security. Therefore, it is uncertain whether any form of MOU or written agreement related to AI will emerge.