Бізнес

Pakistan’s military chief has reportedly sought help from the United Sates in securing the early disbursement of an International Monetary Fund loan as the high price of energy imports pushes the cash-strapped South Asian nation to the brink of a payment crisis.

General Qamar Javed Bajwa spoke by phone to Deputy U.S. Secretary of State Wendy Sherman earlier this week and raised the issue, government sources told VOA late Friday on condition of anonymity.

Pakistan last week reached a staff-level agreement with the IMF for the revival of a multibillion-dollar bailout package. However, the deal is subject to approval by the lender’s board, which is due to meet in late August. Islamabad is expected to get about $4.2 billion under the loan program, starting with an initial tranche of about $1.2 billion.

Foreign Ministry spokesperson Asim Iftikhar Ahmad has confirmed the phone contact between Bajwa and Sherman but did not share details.

“Well, I understand conversation has taken place, but at this stage, I am not in direct knowledge of the content of this discussion,” Ahmad told a weekly news conference in Islamabad.

A State Department spokesperson in Washington would not directly confirm whether the conversion had taken place.

“U.S. officials talk to Pakistani officials regularly on a range of issues. As standard practice, we don’t comment on the specifics of private diplomatic conversations,” the spokesperson told VOA.

Nikkei Asia first reported Friday on the Bajwa-Sherman contact, saying the Pakistani military chief asked for the White House and Treasury Department to use their leverage to help speed up the release of the loan. The United States is the largest shareholder in the IMF.

“Yes,” the sources in Islamabad said when asked whether the two officials had spoken on the matter involving the IMF loan disbursement. The outcome of Bajwa’s appeal was not known immediately, however.

Critics attributed the delay in the release of the loan to Pakistan’s track record of not living up to commitments to undertake crucial economic reforms.

Late on Friday, Bajwa also spoke by phone to General Michael Erik Kurilla, the commander of the U.S. CENTCOM.

The army’s media wing in a statement quoted its chief as telling Kurilla that Pakistan “values its relations with (the) U.S. and we earnestly look forward to enhance mutually beneficial multi-domain relations based on common interests.”

The statement quoted U.S. commander as pledging “to play his role for further improvement in cooperation with Pakistan at all levels.”

The approval of the IMF program is key to Pakistan’s access to other avenues of finances for the country, including the World Bank and the Asian Development Bank.

Pakistan’s central bank foreign exchange reserves have dwindled to just about $8.5 billion, barely enough to cover a few weeks of imports, and its currency has fallen to historic lows against the U.S. dollar in recent days, with inflation at its highest in more than a decade.

Shortly after negotiating the deal with the IMF, Prime Minister Shehbaz Sharif’s coalition government said it would “very soon” receive the first tranche of $1.17 billion.

But Sharif is under increasing pressure from ousted Prime Minister Imran Khan, who is demanding the government step down and hold snap general elections in Pakistan.

Khan criticized Bajwa for reaching out to Washington, saying “it is not the job of an army chief to talk to the U.S. on financial matters.” The deposed prime minister told local ARY television channel in an interview the army chief’s move had demonstrated that neither the IMF nor foreign governments trust the Shehbaz administration.

Analysts noted, however, that both civilian and military leaders in Pakistan have traditionally conducted economic dealings with Washington, citing the army’s role in  Pakistani politics and foreign policy matters.

Khan alleges Shehbaz conspired with Washington to orchestrate his government’s ouster in a parliamentary vote of confidence in April, triggered in part by rising inflation. The U.S. rejects the charges.

The former prime minister indirectly also has accused the military chief of playing a role in his removal from office, charges the army rejects as politically motivated.

Khan and his Pakistan Tehreek-e-Insaf party are campaigning hard to stage a comeback in the next election widely expected to be held by October. The opposition leader has organized and addressed massive anti-government public rallies across Pakistan since his ouster.
…

The European Union’s statistical office, Eurostat, on Friday estimated inflation is expected to reach a record 8.9% in July, while the Eurozone and EU economy overall continued to grow during the first quarter of 2022.

In its report, Eurostat indicated inflation in July was driven largely by the energy sector with 39.7% growth, down from 42% in June. The food, alcohol and tobacco sector follows, with a rise of 9.8%, compared with 8.9% in June. The non-energy industrial goods sector grew 4.5% compared with 4.3% in June, and the services sector grew 3.7%, compared with 3.4% in June.

For months, inflation has been running at its highest levels since 1997, when record-keeping for the euro began, leading the European Central Bank to raise interest rates last week for the first time in 11 years and signal another boost in September.

Meanwhile, Eurostat also reported Friday the eurozone’s seasonally adjusted GDP increased by 0.7% and by 0.6% in the EU overall, compared with the previous quarter. In the first quarter of 2022, GDP had grown by 0.5% in the euro area and 0.6% throughout the EU.

The positive numbers come despite stagnant growth in Germany, Europe’s largest economy. France showed modest 0.5% growth, while Italy and Spain exceeded expectations with 1 and 1.1% economic expansions, respectively.

Eurostat says the numbers for both GDP growth and inflation are preliminary flash estimates based on data that are incomplete and subject to further revision.

The Associated Press, citing regional economic analysts, reports a rebound in tourism following the COVID-19 pandemic helped drive economic growth. The analysts caution, however, that inflation, rising interest rates and the worsening energy crisis are expected to push the region into recession later this year.

Some information for this report was provided by the Associated Press.
…

A breakthrough agreement announced by Senate Democrats on Wednesday, which would dedicate hundreds of billions of dollars to addressing climate change and other Democratic priorities, is designed to raise federal revenues by increasing taxes on wealthy Americans and large corporations. But the agreement sidesteps an international tax agreement brokered by the Biden administration.

That agreement, which is meant to require large multinational companies to pay taxes in the countries where they do business and to pay a global minimum of 15% on profits worldwide, is opposed by Senator Joe Manchin, the conservative Democrat who has withheld his vote on a number of the Biden administration’s priorities. Manchin said he is concerned that U.S. companies will be placed at a disadvantage if the U.S. implements the law and other countries do not.

The 15% global minimum tax is distinct from a 15% minimum tax on corporations that is reportedly in the deal that Manchin struck with Senate Majority Leader Chuck Schumer.

The agreement in the new proposed deal applies to “taxable income” and takes many deductions and adjustments into account. The international deal applies to “book income,” which corporations report on financial statements to shareholders and is typically a much larger figure. 

Ironically, the failure to implement the law could harm U.S. tax revenues while doing little to benefit companies based here. A provision in the agreement allows other countries to impose additional taxes on multinational corporations if their home countries do not tax their profits at a minimum rate of 15%. 

According to Congress’s Joint Committee on Taxation, if the U.S. were to adopt the agreement and implement that rule, the Internal Revenue Service would collect an additional $23 billion in 2023, and nearly $319 billion in the 10 years ending in 2032. The committee says failure to adopt the rule could mean those revenues flow to other countries’ treasuries. 

Adoption slow

The U.S. is not the only country slow in adopting the new rules. European Union negotiations over implementation recently hit a snag when Hungary declared itself unwilling to raise taxes on its domestic corporations. The United Kingdom and Japan have drafted implementation guidelines, but they are not yet official. 

The overwhelming majority of countries that signed on to the accord have still not taken steps to actually put it in place. 

“This entire process has been very uncertain and difficult to predict,” Will McBride, vice president of federal tax and economic policy at the Tax Foundation, told VOA. “It’s actually introduced a lot of uncertainty into international tax, although it was initially pitched, and continues to be pitched, as a way to create certainty for taxpayers.” 

135-country agreement

The global minimum tax is part of a larger international taxation framework developed under the auspices of the Organization for Economic Cooperation and Development and the G-20 group of large economies. The deal brought together more than 135 countries in an effort to control “base erosion and profit shifting,” known by the acronym BEPS.  

BEPS refers to tax strategies employed by multinational corporations. The practice involves strategically placing operations in low-tax jurisdictions, thereby eroding the tax “base” of their home countries, and then “shifting” profits earned internationally so that they are paid in those low-tax jurisdictions.  

The OECD estimates that as much as $240 billion in global tax revenue is lost to BEPS every year.  

Two pillar

The agreement, finalized in 2021, has two pillars. The first includes a mechanism for allocating a share of large multinational corporations’ profits to the countries where their products and services are actually consumed, preventing those profits from being booked in tax haven countries. 

The second pillar includes a 15% minimum tax rate on those profits across all countries in the agreement. The pillar also contains a mechanism meant to prevent participating countries from reducing their tax rates in order to attract companies to their shores. If a country does not tax corporate profits earned within its borders at 15%, other countries have the ability to “top up” their tax assessments of those companies in order to bring its total tax rate up to 15%.  

The thinking behind the design is that it eliminates the benefits a corporation gets from moving to a low-tax country, while simultaneously encouraging governments around the world to adopt the 15% rule, because if they do not, other governments will collect the additional taxes anyway. 

“Under Pillar Two, it’s the country of residence that gets the first crack at taxing the foreign income of their multinationals,” Thornton Matheson, a senior fellow at the Urban-Brookings Tax Policy Center, told VOA. “But if they don’t do that, then the countries in which they operate can effectively tax their subsidiaries as if they were subject to such a rule.” 

“If the European countries were all applying this, it could undermine U.S. revenues,” she said, adding that such a situation would create an incentive for the U.S. to put the agreement into force. 

Doubts about effectiveness

Some experts remain doubtful that the global minimum tax, even if it were adopted universally, would actually end the practice of countries using financial incentives to attract corporations to their jurisdictions. 

Gary Clyde Hufbauer, a nonresident senior fellow at the Peterson Institute for International Economics, told VOA that even with a 15% minimum tax in place and strictly enforced, there are a multitude of ways that governments can deliver other benefits that offset that burden. 

As an example, he pointed to the legislation currently working its way through Congress that would provide billions in subsidies and tax credits to the semiconductor industry in order to spur growth in U.S.-based production. 

“If you have a minimum tax of 15%, and then give $50 billion plus $24 billion of tax credits to semiconductor companies, what does that tell you? To me as an economist, that’s a negative tax. And other countries will do the same for industries that they regard as critical to their security or livelihood, or whatever the rationale is,” he said.

McBride of the Washington-based Tax Foundation noted that the agreement has an explicit carve-out that prevents direct subsidies from being counted as an offset to a company’s tax burden. 

“It actually incentivizes countries … to go with direct subsidies as a way to attract companies,” he said. 
…

The U.S. president and members of his administration are avoiding the “R word” – recession – despite the assertion by opposition party politicians and some economists that the country’s economy now meets that definition.

Speaking in the White House State Dining Room on Thursday, President Joe Biden said Federal Reserve Chairman Jerome Powell, as well as “many of the significant banking personnel and economists, say we’re not in recession.”

He then outlined the job growth and high-tech investment during his administration, concluding “that doesn’t sound like a recession to me.”

Biden’s remarks came after the Commerce Department released data on Thursday showing the U.S. economy has contracted for a second straight quarter, a traditional benchmark for a recession.

The president and his administration’s chief financial officer, Treasury Secretary Janet Yellen, are to make remarks later in the afternoon about the nation’s economy.

The gross domestic product of the United States – the broad measure of goods and services produced in the country – shrank at a seasonally adjusted annual rate of 0.9 percent in the April through June period, according to the Commerce Department’s Bureau of Economic Analysis. That follows a 1.6% decline in this year’s first quarter.

“Popularly we are in a recession, because most people think that a recession involves two consecutive quarters of negative economic growth, and we’ve got that,” Desmond Lachman, an economist at the American Enterprise Institute, told VOA.

Consumer sentiment “now is close to record low levels, they’re struggling with high inflation, the wages are getting eroded, they’ve lost a lot of money on the stock exchange. So, consumers don’t feel good about the economy,” added Lachman.

Recessions in the United States are officially declared by the National Bureau of Economic Research, but such determinations are made in retrospect. Its definition of a recession is based on a significant decline in economic activity over numerous months, taking into consideration such factors as employment, output, retail sales, and household income.

“They [the BEA] only make that judgment, something like six months or a year after the numbers look like they’re indicating the recession. So, in short, it’s too early to say that we’re officially in a recession,” said Lachman.

In the meantime, economists outside the government and elected officials are free to spin the numbers to make their own declarations.

“The Biden White House can play word games and try and contort the English language as it sees fit in order to advance its radical and harmful agenda. What this administration cannot change is the fact that American consumer confidence continues to fall under Biden’s watch,” said Steve Moore, an economist with FreedomWorks, a conservative advocacy group. “Americans are overwhelmingly pessimistic about the state of the Biden economy, and no wordplay over the definition of ‘recession’ can change that.”

Numerous Republican members of Congress quickly took to Twitter immediately after the data was released to declare the country is now in a recession.

“Democrats threw us into recession,” said Senator Ted Cruz, a member of the Senate’s joint economic committee.

“Biden and his army of woke journalists can obscure this all they want, but they cannot escape this fact: America is in a recession,” declared Carlos Gimenez, a congressman from Florida and member of the House transportation and infrastructure committee. “Hardworking American families deserve so much better than what this administration has put us through in the last year.”

“The U.S. is officially in a recession, thanks to the Democrats’ reckless spending. Americans are suffering because of Joe Biden’s America-last policies,” said Jeff Duncan, a congressman from South Carolina and a member of the House Energy and Commerce committee.

Inflation in the country hit a 40-year high of 9.1 percent last month. The country’s central bank, the Federal Reserve, hiked interest rates on Wednesday by three-quarters of a percent, its latest such increase to try to tame price hikes, but a move some economists warn could trigger a recession.

“The problem with the Federal Reserve is they do too little, too late,” according to Lachman. “By the time that they started raising interest rates at the beginning of this year, the inflation genie was well out of the bottle – we had multi-decade highs in the inflation rate. The same thing is now occurring this time around that the Fed keeps raising interest rates, even though there are rather clear signs that the economy is slowing.”

Lachman, a former official of the International Monetary Fund, noted that the actions by the Federal Reserve have put a lot of developing economies under pressure as capital that had flowed to those countries has returned to the United States, and a stronger dollar is making it difficult for those countries to fund their balance of payment deficits.

“Once the United States economy slows, it means that the export markets for the emerging market countries isn’t as robust as it was before. So, we could see difficulty for the emerging market, certainly the remainder of this year, but there might be relief next year, once the Fed stops this interest rate hiking cycle and begins cutting interest rates,” predicted Lachman.

“Our goal is to bring inflation down and have a so-called soft landing, by which I mean a landing that doesn’t require a significant increase in unemployment,” Powell told reporters on Wednesday. “We understand that’s going to be quite challenging. It’s gotten more challenging in recent months.”
…

The United States is due to release economic growth data from April to June on Thursday, amid fears the economy could be approaching a recession.

Forecasters estimated slight growth in the second quarter of less than 1%.

The previous quarter saw the gross domestic product decline 1.6%.

A second consecutive negative quarter would meet the informal definition of a recession.

Thursday’s report comes a day after the Federal Reserve again raised the benchmark interest rate as it tries to bring down inflation.

Some information for this report came from The Associated Press and Agence France-Presse.
…

Chinese authorities are promising to establish an initial rescue fund of $11.8 billion (80 billion yuan) to offset a looming crisis in the real estate sector, where homebuyers routinely purchase residences from developers’ plans and begin making mortgage payments before the dwellings are finished. 

By having customers purchase homes “off plan,” builders can receive construction financing and shift risks — such as costly pandemic-related supply chain delays and bankrupt builders — to the middle-class homebuyers. 

For many buyers, the risks seemed worth it. But then China’s COVID-cooled economy strained many family budgets, and draconian lockdowns stalled work on residential projects. As home prices fell, some buyers found themselves paying mortgages on properties worth less than what they had agreed to pay. That was followed by the tightening policies in August 2020, when the central government realized real estate developers’ debt was getting out of control, and draconian lockdowns stalled work on residential projects. 

Amid all this, many homebuyers announced they would stop making mortgage payments to banks until work resumed on unfinished projects. 

Experts say the boycott is a byproduct of two decades of insufficient oversight over a red-hot real estate sector. One economist likened the situation to a Ponzi scheme, a type of fraud that pays existing investors with funds collected from new investors. 

Reuters describes the promised rescue fund as the first step in creating a “war chest” of as much as $44 billion (300 billion yuan). The state hopes the effort, announced Sunday, will not only help property developers resolve a debt crisis but also restore confidence in the real estate sector. 

A state bank official who declined to be named due to the sensitivity of the matter told Reuters that the fund would initially be set at 80 billion yuan through People’s Bank of China and China Construction Bank. 

High risks, low supervision

Mr. Fang, a real estate developer in China and the United States who asked that VOA Mandarin not use his real name for fear of reprisal, said while U.S. banks supervise and control loans issued to off-plan property developers from groundbreaking to occupancy, Chinese banks offer less supervision. 

According to China’s presale housing regulation, funds received from sales of homes must be used to build them, a process supervised by the Ministry of Housing and Urban-Rural Development and banks.

In practice, however, poor supervision is common, according to Fang. 

In this environment, Chinese developers “want to take big risks,” Fang said. 

Instead of putting buyers’ mortgage payments toward construction of their homes, Fang said, Chinese developers buy more property. 

With the economy and housing market cooling off, it is “basically suicidal” to buy more land on the assumption that developing it will pay for finishing construction underway elsewhere, Fang said. 

‘A bit like a Ponzi scheme’

An economist in China, who requested anonymity due to fear of reprisal, told VOA Mandarin that real estate companies have never been regulated. 

“When the economy is good, with the continuous expansion, most of the properties can be delivered. But when the economy is not good, it becomes a bit like a Ponzi scheme. If there is no follow-up funding, they will not able to complete construction,” she said. 

A Chinese banking regulator said on July 21 that it will coordinate support to property developers in need of loans after homebuyers stopped making mortgage payments, usually putting the money into escrow accounts instead. 

At a press conference in Beijing last Thursday, Liu Zhongrui, director of the Statistical Information and Risk Monitoring Department of the China Banking and Insurance Regulatory Commission (CBIRC), said that banks and other government departments will meet reasonable financing needs of real estate developers. But he did not give details. 

“We actively strengthen the coordination and cooperation with the Ministry of Housing and Urban-Rural Development, the People’s Bank of China and other departments, and support local governments to more effectively promote the work of ‘guaranteeing the delivery of buildings, protecting people’s livelihood, and maintaining stability,'” Liu said. 

The earliest “mortgage boycott notice” by more than 5,000 homebuyers appeared in April 2021 in Taiyuan, in the northern province of Shanxi, after a local developer’s project languished unfinished for more than two years. 

Letters to banks

Last month, homeowners in Jingdezhen, in northeastern Jiangxi province, sent a letter to their banks announcing they were suspending mortgage payments because of the delayed delivery of residential units purchased off plan. Since then, homeowners of more than 300 unfinished residential projects nationwide have sent similar public letters to banks. 

Last week, some 200 frustrated home buyers in Wuhan demonstrated outside a bank regulator’s office, according to an article in The Wall Street Journal. 

It’s unclear how many homebuyers are involved in the protests because Chinese censors are clamping down on news of mortgage boycotts, Reuters reported.

A study, the “2022 National Unfinished Building Research Report,” published July 18 by the Shanghai-based E-House China Research and Development Institution, a think tank that analyzes the real estate market, found that 54% of homeowners who issued mortgage suspension notices came from the central China province of Henan, home to a billion-dollar banking scandal.

According to the report, the value of mortgage loans involving unfinished buildings nationwide was $133.2 billion (900 billion yuan) in the first half of 2022, accounting for 1.7% of the national mortgage balance. 

“This industry is a mess, and no one used this kind of quantitative analysis to analyze it before,” Yan Yuejin, the report’s author and the think tank’s director of research, told VOA Mandarin. 

Although 1.7% does not sound high, it is already very high and poses a serious risk for banks, Yan said. “The banks’ tolerance rate for this [kind of] nonperforming loan … should not exceed 1%.”
…

The U.S. Senate has passed a $280 billion initiative that would boost domestic production of microchips and provide support for a key industry that competes with overseas countries including China. VOA’s Congressional Correspondent Katherine Gypson reports.
…

Meta Platforms Inc. issued a gloomy forecast after recording its first ever quarterly drop in revenue Wednesday, with recession fears and competitive pressures weighing on its digital ads sales. 

Shares of the Menlo Park, California-based company were down about 4.6% in extended trading. 

The company said it expected third-quarter revenue to be in the range of $26 billion to $28.5 billion, which would be a second consecutive year-over-year drop. Analysts were expecting $30.52 billion, according to IBES data from Refinitiv. 

Total revenue, which consists almost entirely of ad sales, fell 1% to $28.8 billion in the second quarter ended June 30, from $29.1 billion last year. The figure slightly missed Wall Street’s projections of $28.9 billion, according to Refinitiv. 

The company, which operates the world’s largest social media platform, reported mixed results for user growth. 

Monthly active users on flagship social network Facebook came in slightly under analyst expectations at 2.93 billion in the second quarter, an increase of 1% year over year, while daily active users handily beat estimates at 1.97 billion. 

Like many global companies, Meta is facing some revenue pressure from the strong dollar, as sales in foreign currencies amount to less in dollar terms. Meta said it expected a 6% revenue growth headwind in the third quarter, based on current exchange rates. 

Still, the Meta results also suggest that fortunes in online ads sales may be diverging between search and social media players, with the latter affected more severely as ad buyers reel in spending. 

Alphabet Inc., the world’s largest digital ad platform, reported a rise in quarterly revenue on Tuesday, with sales from its biggest moneymaker, Google search, topping investor expectations. 

Snap Inc. and Twitter both missed sales expectations last week and warned of an ad market slowdown in the coming quarters, sparking a broad sell-off across the sector. 

On top of economic pressures, Meta’s core business is also experiencing unique strain as it competes with short video app TikTok for users’ time and adjusts its ads business to privacy controls rolled out by Apple Inc. last year. 

The company is simultaneously carrying out several expensive overhauls as a result, revamping its core apps and boosting its ad targeting with AI, while also investing heavily in a longer-term bet on “metaverse” hardware and software. 

Meta executives told investors they were making progress in replacing ad dollars lost as a result of the Apple changes but said it was being offset by the economic slowdown. 

They added that Reels, a short video product Meta is increasingly inserting into users’ feeds to compete with TikTok, was now generating over $1 billion annually in revenue. 

However, Reels cannibalizes more profitable content that users could otherwise see and will continue to be a headwind on profits through 2022 before eventually boosting income, executives told analysts on Wednesday. 

“They are being greatly affected by everything,” Bokeh Capital Partners’ Kim Forrest said, referring to the economic slowdown as well as competition from TikTok and Apple.  

“Meta has a problem because they’re chasing TikTok and if the Kardashians are talking about how they don’t like Instagram … Meta should really pay attention to that.” 

On Monday, two of Instagram’s biggest users, Kim Kardashian and Kylie Jenner, shared a meme imploring the company to abandon its shift to TikTok-style content suggestions and “make Instagram Instagram again.” 

Not persuaded

CEO Mark Zuckerberg did not appear to be swayed, however. 

About 15% of content on Facebook and Instagram is currently recommended by AI from accounts users do not actively follow, and that percentage will double by the end of 2023, he told investors on the call. 

For now, at least, the metaverse part of Meta’s business remains largely theoretical. In the second quarter, Meta reported $218 million in non-ad revenue, which includes payments fees and sales of devices like its Quest virtual reality headsets, down from $497 million last year. 

Its Reality Labs unit, which is responsible for developing metaverse-oriented technology like the VR headsets, reported sales of $452 million, down from $695 million in the first quarter. 

Although Meta has recently slowed investments as cost pressures increased, executives reassured investors it was still on track to release a mixed-reality headset called Project Cambria later this year, focused on professionals. 

Meta broke out the Reality Labs segment in its results for the first time earlier this year, when it revealed the unit had lost $10.2 billion in 2021. 

Its second-quarter operating profit margin fell to 29% from 43% as costs rose sharply and revenue dipped. 

In November, Chief Financial Officer David Wehner will become Meta’s first chief strategy officer. Susan Li, Meta’s current vice president of finance, will become CFO.
…

The U.S. Federal Reserve is expected to impose a second major interest rate increase Wednesday in an effort to combat soaring inflation.

Observers say the central bank will likely announce an interest rate hike of three-quarters of one percentage point. The expected rate hike would be similar to one last month — the biggest boost in nearly three decades as the U.S. inflation rate soared to an annual rate of 8.6%, the highest in 40 years.

The U.S. economy has seen rising demand for goods and services among consumers as the global COVID-19 pandemic has steadily waned. But that has also led to the rising cost of most commonly used items, such as gasoline, food and clothing, as well as major items like cars, appliances and furniture.

The decision by the Federal Reserve to increase the interest rate consumers pay to borrow money is aimed at lowering such demand, which could help lower prices and bring inflation back down to the central bank’s target rate of 2% per year — but without pushing too far and causing a recession, which could lead to job losses and more economic pain.

All three major U.S. stock indices closed lower Tuesday after giant retailer Walmart cut its profit outlook and warned that rising prices of food and gasoline were prompting consumers to cut back on buying higher priced goods like electronics and clothes.

Some information for this report came from The Associated Press and Reuters.
…

Two decades ago, China’s factory-driven economy awed the world as it expanded at more than 10% per year. But the country has missed double-digit growth over the past decade. The GDP shrank from April to June this year compared with the previous three months, though it topped the same quarter of 2021, but just barely.

Economists tell a consistent story about how the drop happened: Lockdowns to stop COVID-19 infections hurt factory work and export shipments. They say those setbacks added to financial hardships among China’s top property firms and the shocks of a 2021 crackdown on major Chinese tech icons. 

China’s $18 trillion economy, the world’s second largest after the United States, shrunk 2.6% from April to June compared to the first three months of the year. 

“China’s economy has seen signs of disruption since February due to the impact of COVID-19 outbreaks in a number of Chinese cities,” said Rajiv Biswas, executive director and Asia-Pacific chief economist at S&P Global Market Intelligence. He called industrial production, retail sales and port operations particular trouble spots. 

“The resulting disruption to retail sales and industrial production has been quite severe during April and May. And in Shanghai, port operations and logistics were also quite heavily disrupted during April,” Biswas said. 

Shanghai is China’s chief port city. The central government ordered lockdowns there in April. 

China’s economy grew close to 10% per year from 2003 to 2010, World Bank data show. Annual growth gradually slowed through 2019 before dipping to 2.2% in the first pandemic year, 2020, and rebounding to 8.1% last year.

Pressure on jobs, spending 

The lockdown-weary country recorded more than 6% unemployment in April, compared with nearly 5% (4.8%) at the end of 2021. Younger workers  and smaller firms have been hit especially hard, analysts say.  

Individuals contacted by VOA in Beijing, Shanghai and the inland city of Changsha this week said they knew about the employment crunch but felt their own jobs were stable.

“At least I don’t know of any friends around me who are jobless, and I’ve not heard that many complaints,” said a fashion importer who spoke on condition of anonymity.

Chinese consumers are now spending less than normal because they cannot go outside during mandatory closures, or they fear cuts in income from eventual job losses, said Alicia Garcia-Herrero, chief Asia-Pacific economist at French investment bank Natixis, who is based in Hong Kong. 

Retail sales grew at a low of 3% in June, even as lockdowns eased, Garcia said, pointing to “very negative sentiment as well as very slow growth in disposable income.”

“It is very clear that the household sentiment remains very negative, perhaps because of the uncertainty of future lockdowns as mass testing remains pervasive,” she said. 

Setbacks in property, tech, global confidence 

Last year, the economy was already faltering due to problems in real estate and tech. 

A number of big name Chinese property developers began to default on billions of dollars’ worth of loans last year, according to consultant firm Dezan Shira & Associates, who said homeowners who bought units through a “pre-pay model” are now refusing to pay mortgages on unfinished homes.

In tech, Chinese regulators began in cracking down on the country’s most powerful firms in late 2020, including e-commerce giant Alibaba Group and social media juggernaut Tencent. Regulators have cited concerns about monopolistic activity and data security.  

China’s economic malaise is worrying world markets because the “slope” of recovery is less steep than it was when COVID-19 hit in 2020, said Zerlina Zeng, a senior analyst at the CreditSights research firm in Singapore. Missed mortgage payments threaten the value assets, including property, she added.

Disruptions to export shipping and manufacturing in China have hobbled supply chains in much of the world, in turn adding to inflation and fears of recession.

Is the worst over? 

Officials in Beijing are nudging the economy forward again by spending on infrastructure. The GDP is already showing signs of recovery, Zeng said. Demand for cement and cars, including electric ones, is already up, she said. Officials are also relaxing last year’s tough stance on the tech industry, Zeng added.  

“Overall, we are seeing a better macro picture” this quarter, she said. “We think that for sure, [the economy] is going to recover but that the slope of the recovery is not going to be as good as what the market had expected back in the first quarter of this year.” 

Any future lockdowns will probably target neighborhoods rather than all of Shenzhen or Shanghai as the government did earlier this year, Zeng said. But she cautioned that China’s goal of 5.5% economic growth this year is “very ambitious.”

The government-run China Daily posted an investment bank editorial last week calling for 5.3% economic growth year on year from July through September, and 5.9% in the final months of 2022.
…

World economic growth is slowing and the prospects for a quick recovery are gloomy, the International Monetary Fund said Tuesday.

The IMF said it expects growth to slow from last year’s 6.1% advance across the globe to 3.2% this year, four-tenths of a percentage point lower than it forecast in April.

“A tentative recovery in 2021 has been followed by increasingly gloomy developments in 2022 as risks began to materialize,” the IMF said. “Global output contracted in the second quarter of this year, owing to downturns in China and Russia, while U.S. consumer spending undershot expectations.”

The Washington-based international finance agency said that “several shocks have hit a world economy already weakened by the pandemic: higher-than-expected inflation worldwide – especially in the United States and major European economies – triggering tighter financial conditions; a worse-than-anticipated slowdown in China, reflecting COVID-19 outbreaks and lockdowns; and further negative spillovers from [Russia’s] war in Ukraine.”

The IMF said the price of consumer goods, especially for food and energy, is increasing throughout the world. The cost is expected to rise by 6.6% in advanced economies this year and by 9.5% in emerging market and developing economies, with both figures up nearly a percentage point from the IMF’s earlier projection.

“The risks to the outlook are overwhelmingly tilted to the downside,” the IMF said.

It said the war in Ukraine “could lead to a sudden stop” of Russia’s export of natural gas to European countries and that “inflation could be harder to bring down than anticipated” if employers cannot find enough workers to meet their labor demands or inflation increases at a faster pace than expected.

The IMF said that a “plausible alternative scenario” to its already diminished forecast would be a world economy “in which risks materialize, inflation rises further, and global growth declines” to about 2.6% and 2% percent in 2022 and 2023, respectively, figures that would put growth in the bottom 10% of outcomes since 1970.

“With increasing prices continuing to squeeze living standards worldwide, taming inflation should be the first priority for policymakers,” the IMF said.

The IMF forecast came as policy makers at the U.S. central bank, the Federal Reserve, began two days of meetings in Washington with the expectation they will announce another three-quarters of a percentage point increase in the Fed’s benchmark percentage rate on Wednesday, an effort to curb rampant inflation in the U.S., the world’s biggest economy.

With June’s 9.1% year-over-year surge in consumer prices in the U.S. – the fastest pace in four decades – the Fed has already boosted its prime lending rate this year from near zero percent to 1.6% and expects to end 2022 at 3.4%.

Increases in the Fed’s interest rate reverberate through the U.S. economy, with higher borrowing costs for car loans and consumer goods. By making it costlier to borrow money, the Fed’s expectation is that consumers and businesses will cut their spending and thus help curb inflation.
…

Zimbabwe’s central bank has introduced gold coins that it hopes will ease citizens’ demands for foreign currency. But economists and ordinary Zimbabweans are skeptical.

At the official launch of the gold coins in Harare on Monday, John Mangudya, head of the Reserve Bank of Zimbabwe, said the coins are designed to reduce demand for U.S. dollars in the country.

Zimbabweans are largely shunning the weak local dollar in favor of U.S. greenbacks, which Zimbabweans see as more acceptable abroad and better at holding their value long term.

Mangudya said he hoped that Zimbabweans will now opt for the gold coins, which cost about $1,800 each.

“We are now providing that store of value to ensure that people do not run to the parallel market in search for foreign currency to store value,” he said. “And there is no other better product that can be used to store value other than gold.”

Mangudya said the coin is a sign of respect for the people of Zimbabwe.

“We know what you have been going through in terms of the fear factor of losing value and therefore we are providing this gold coin,” he said. It’s a genuine gold coin to ensure that it is saved and invested there.”

Mangudya said 2,000 coins will be manufactured, with future production depending on the public’s appetite.

Prosper Chitambara, a senior researcher and economist at the Labor and Economic Development Research Institute of Zimbabwe, said despite the bank’s hopes he doubts the coins will drastically reduce demand for American dollars.

“Even the demand for U.S. dollar as a store of value, it will also rise because there are still a lot of uncertainties relating to the convertibility of these gold coins — are [they] internationally tradeable, especially given the trust and confidence issues?” Chitambara said.

Chitambra also expressed caution about the coin.

“Most people may not have money to buy this since most citizens are literally living from hand to mouth,” Chitambara said.

One of those Zimbabweans struggling to get by is Christine Kayumba, a high school teacher in Harare.

“The issue of gold coins to us teachers in Zimbabwe, is something we can dream of,” Kayumba said. “It means a teacher who is getting a salary of $190 to $200 would need nine to 10 months to buy one gold coin.”

For Kayumba, that $200 of salary pays for transport, food, rent and money to send children to school. It’s money to live, she said, not to buy a gold coin.

“So, I believe the gold coins were meant for the rich people, not the ordinary teacher or any civil servant in Zimbabwe,” she said.

Mangudya told reporters Monday that gold coins of lesser value would be minted in future to cater for people who have fewer resources.
…

German business morale fell more than expected in July, the Ifo business sentiment survey showed on Monday, as the institute that compiles it said high energy prices and looming gas shortages had left Europe’s largest economy on the cusp of recession.

The Ifo institute’s closely watched business climate index dropped to 88.6, its lowest in more than two years and below the 90.2 forecast in a Reuters poll of analysts. June’s reading was marginally revised down to 92.2.

“Recession is knocking on the door. That can no longer be ruled out,” said Ifo surveys head Klaus Wohlrabe.

Germany faces the threat of gas rationing unprecedented in generations this winter following a significant drop in supplies from Russia, whose president, Vladimir Putin, the West accuses of weaponizing energy in response to sanctions levied against him over the war in Ukraine.

Russia says it is conducting a “special military operation” there to fight nationalists.

Russia this month shut down the Nord Stream 1 pipeline that supplies Germany with gas via the bed of the Baltic Sea for 10 days of maintenance that some feared would be extended.

Pumping resumed on Thursday, but at only 40% of capacity.

Wohlrabe told Reuters in an interview that if German gas deliveries continued at that level “there will be no recession.”

However, Germany’s gas network regulator said on Friday that, if gas through the pipeline continued to be pumped at only 40%, the country would need to take “additional measures” to reach the 90% of storage capacity set as a target to avert winter rationing.

The government has said it would prioritize residents over the corporate sector in the event of rationing, and Monday’s Ifo index, which surveys about 9,000 firms, showed expectations for business to significantly worsen in the coming months.

“The Ifo business climate index, like the purchasing managers’ index, now clearly points to a downturn in the German economy,” said Commerzbank economic analyst Jorge Kraemer.

“How bad it ends up unfortunately lies mainly in Putin hands.”

S&P Global’s flash Purchasing Managers’ Index (PM) for German services and its index for manufacturing both fell to 49.2 in July, data showed on Friday, below analyst forecasts for them to hold above the 50 mark that separates growth from contraction.
…

Treasury Secretary Janet Yellen on Sunday said the U.S. economy is slowing but pointed to healthy hiring as proof that it is not yet in recession.

Yellen spoke on NBC’s “Meet the Press” just before a slew of economic reports will be released this week that will shed light on an economy currently besieged by rampant inflation and threatened by higher interest rates. The data will cover sales of new homes, consumer confidence, incomes, spending, inflation, and overall output.

The highest-profile report will likely be Thursday, when the Commerce Department will release its first estimate of the economy’s output in the April-June quarter. Some economists forecast it may show a contraction for the second quarter in a row. The economy shrank 1.6% in the January-March quarter. Two straight negative readings is considered an informal definition of a recession, though in this case economists think that’s misleading.

Instead, the National Bureau of Economic Research — a nonprofit group of economists — defines a recession as “a significant decline in economic activity that is spread across the economy and lasts more than a few months.”

Yellen argued that much of the economy remains healthy: Consumer spending is growing, Americans’ finances, on average, are solid, and the economy has added more than 400,000 jobs a month this year, a robust figure. The unemployment rate is 3.6%, near a half-century low.

“We’ve got a very strong labor market,” Yellen said. “This is not an economy that’s in recession.”

Still, Yellen acknowledged the economy is “in a period of transition in which growth is slowing,” from a historically rapid pace in 2021.

She said that slowdown is “necessary and appropriate,” because “we need to be growing at a steady and sustainable pace.”

Slower growth could help bring down inflation, which at 9.1% is the highest in two generations.

Still, many economists think a recession is on the horizon, with inflation eating away at Americans’ ability to spend and the Federal Reserve rapidly pushing up borrowing costs. Last week, Bank of America’s economists became the latest to forecast a “mild recession” later this year.

And Larry Summers, the treasury secretary under President Bill Clinton, said on CNN’s “GPS” Sunday that “there’s a very high likelihood of recession,” as the Fed lifts interest rates to combat inflation. Those higher borrowing costs are intended to reduce consumer spending on homes and cars and slow business borrowing, which can lead to a downturn.

On Wednesday, the Federal Reserve is likely to announce its second 0.75% point increase in its short-term rate in a row, a hefty increase that it hasn’t otherwise implemented since 1994. That will put the Fed’s benchmark rate in a range of 2.25% to 2.5%, the highest level since 2018. Fed policymakers are expected to keep hiking until its rate reaches about 3.5%, which would be the highest since 2008.

The Fed’s hikes have torpedoed the housing market, as mortgage rates have doubled in the past year to 5.5%. Sales of existing homes have fallen for five straight months. On Tuesday, the government is expected to report that sales of new homes dropped in June.

Fewer home sales also means less spending on items that typically come with purchasing a new house, such as furniture, appliances, curtains, and kitchenware.

Many other countries are also grappling with higher inflation, and slower growth overseas could weaken the U.S. economy. Europe is facing the threat of recession, with soaring inflation and a central bank that just last week raised interest rates for the first time in 11 years.

European Central Bank President Christine Lagarde also sought to minimize recession concerns in a news conference last Thursday.

“Under the baseline scenario, there is no recession, neither this year nor next year,” Lagarde said. “Is the horizon clouded? Of course it is.”
…

Police in Madagascar detained two leading members of the main opposition party on Saturday during a protest in the capital against rising living costs and economic hardship.

Several hundred anti-government demonstrators gathered in the center of Antananarivo in the morning, watched by a heavy military and police presence.

Police said they arrested Rina Randriamasinoro, the secretary general of the opposition Tiako I Madagasikara (TIM) party, and its national coordinator Jean-Claude Rakotonirina following tensions between demonstrators and security forces. The pair were later released.

“They were arrested and placed in police custody because they made comments inciting hatred and public unrest,” Antananarivo’s prefect Angelo Ravelonarivo told AFP.

Inflation has soared to the highest level in decades in many countries, fueled by the war in Ukraine and the easing of COVID-19 restrictions.

Organizers had wanted to hold the rally inside a warehouse belonging to opposition leader Marc Ravalomanana, but demonstrators arrived to find security forces blocking access to the venue.

Protesters then staged a sit-in outside the building.

Footage shared on social media showed police pulling Randriamasinoro and Rakotonirina from the crowd before taking them away in a police vehicle.

“The rally was authorized yesterday by the prefect and then this morning we discovered the police outside the gate,” said opposition lawmaker Fetra Ralambozafimbololona.

The arrests sparked further remonstrations, with demonstrators vowing not to leave the area until the two men were released — before eventually dispersing in the afternoon.

Randriamasinoro and Rakotonirina were eventually let go early in the evening, a police spokesperson said, adding authorities were yet to decide whether to press charges against them.

Protests are rare in the country with the opposition and rights groups accusing the government of President Andry Rajoelina of stifling dissent and rarely allowing demonstrations.

“We can’t say anything anymore,” said Samuel Ravelarison, a 63-year-old accountant attending the rally. “We came to demonstrate against the high cost of living.”

Ravelonarivo, the prefect, said that while the demonstration had not been banned, he had suggested it be held at a different location away from the city center.

One of the poorest nations in the world, Madagascar is still reeling from the economic effects of the coronavirus pandemic and a series of extreme weather events.

Tropical storms and cyclones have battered the country this year, killing more than 200 people, adding to the damage of a severe drought that has ravaged the island’s south leading to malnutrition and instances of famine.

Rajoelina, 48, first came to power in 2009, ousting Ravalomanana with the backing of the military.

He returned to the presidency in 2019, after beating his predecessor in an election beset by allegations of fraud.
…

As inflation surges around the world, politicians are scrambling for ways to keep food affordable as people increasingly protest the soaring cost of living. One knee-jerk response has been food export bans aimed at protecting domestic prices and supplies as a growing number of governments in developing nations try to show a nervous public that their needs will be met.

For business owners, the rising cost of cooking ingredients — from oil to chicken — has prompted them to raise prices, with people paying 10% to 20% more at Soki Wu’s food stall in Singapore. For consumers, it has meant paying more for the same or lesser-quality food or curbing certain habits altogether.

In Lebanon, where endemic corruption and political stalemate has crippled the economy, the U.N. World Food Program is increasingly providing people with cash assistance to buy food, particularly after a devastating 2020 port blast that destroyed massive grain silos. Constant power cuts and high fuel prices for generators limit what people can buy because they can’t rely on freezers and refrigerators to store perishables.

Tracy Saliba, a single mother of two and business owner in Beirut, says she used to spend around a quarter of her earnings on food. These days, half her income goes to feeding her family as the currency loses strength amid soaring prices.

“I’m not buying (groceries) like I used to,” Saliba said. “I’m just getting the necessary items and food, like day by day.”

Food prices have risen by nearly 14% this year in emerging markets and by over 7% in advanced economies, according to Capital Economics. In countries where people spend at least a third or more of their incomes on food, any sharp increase in prices can lead to crisis.

Capital Economics forecasts that households in developed markets will spend an extra $7 billion a month on food and beverages this year and much of next year due to inflation.

The pain is being felt unevenly, with 2.3 billion people going severely or moderately hungry last year, according to a global report by the World Food Program and four other U.N. agencies.

Food prices accounted for about 60% of last year’s increase in inflation in the Middle East and North Africa, with the exception of oil-producing Gulf countries. The situation is particularly dire for Sudan, where inflation is expected to hit 245% this year, and Iran, where prices spiked as much as 300% for chicken, eggs and milk in May, sparking panic and scattered protests.

In Somalia, where 2.7 million people cannot meet their daily food requirements and where children are dying of malnutrition, sugar is a source of energy. In May, a kilogram of sugar cost about the equivalent of 72 cents in Mogadishu, the capital. A month later, it had shot up to $1.28 a kilogram.

“In my home, I serve tea (with sugar) three times a day, but from now on, I have to reduce it drastically to only making it when guests arrive,” said Asli Abdulkadir, a Somali housewife and mother of four.

People there are bracing for even higher costs after India announced it would cap sugar exports this year. Even if that doesn’t reduce India’s sugar exports compared with previous years, news of the restriction was enough to cause speculation among traders like Ahmed Farah in Mogadishu.

“The cost of sugar is expected to surge since Somalia counts heavily on the white sugar exported from India and a few brown sugars from Brazil,” he said.

Food export restrictions aimed at protecting domestic supplies and capping inflation is one reason for the rising cost of food.

Food prices had been steadily climbing worldwide because of drought, supply chain issues, and high energy and fertilizer costs. The U.N. Food and Agriculture Organization says food commodity prices were up 23% last year.

Russia’s war in Ukraine further sent the price of wheat and cooking oils up, fueling a global food crisis. There was a breakthrough this week to create safe corridors for Black Sea shipments, but Ukrainian ports have been blocked from exporting these key goods for months and it will take time to get them moving again to vulnerable countries worldwide.

There’s concern that the impact of all these factors will lead more countries to resort to food export bans, which are felt globally. When Indonesia blocked the export of palm oil for a month in April, palm oil prices spiked by at least 200%.

Analysts say food export bans are shortsighted because they have a domino effect of driving up prices.

“I would say that roughly 80% of the bans we see are ill-advised — a kind-of, sort-of gut reaction by certain politicians,” said David Laborde, who is credited with creating a food trade policy tracker at the International Food Policy Research Institute.

“In the world where you will be the only one to do it, that can make sense,” he said. “But in a world where other countries can also do it, actually that’s far from being a good idea.”

Laborde said bans are “a very selfish policy … because you try to get better by making things worse for others.”

The list of food export restrictions Laborde has been tracking since the COVID-19 pandemic is long and changes constantly. Examples of their impact include Kazakhstan’s restrictions on grains and oil on prices in Uzbekistan, Tajikistan, Turkmenistan and Afghanistan; Cameroon’s rice export restriction on Chad; and Tunisia’s fruit and vegetable restrictions on Libya.

In Singapore, 29-year-old Wu is hopeful he can keep the family business running as Singapore’s government signed off on Indonesia as a new chicken supplier.

“Things will get better,” he said. “(This) will only make us more resilient.” 
…

From his small office in Singapore, Kelvin Pang is ready to wager a $23 million payday that the worst of the chip shortage is not over for automakers – at least in China.

Pang has bought 62,000 microcontrollers, chips that help control a range of functions from car engines and transmissions to electric vehicle power systems and charging, which cost the original buyer $23.80 each in Germany.

He’s now looking to sell them to auto suppliers in the Chinese tech hub of Shenzhen for $375 apiece. He says he has turned down offers for $100 each, or $6.2 million for the whole bundle, which is small enough to fit in the back seat of a car and is packed for now in a warehouse in Hong Kong.

“The automakers have to eat,” Pang told Reuters. “We can afford to wait.”

The 58-year-old, who declined to say what he had paid for the microcontrollers (MCUs), makes a living trading excess electronics inventory that would otherwise be scrapped, connecting buyers in China with sellers abroad.

The global chip shortage over the past two years – caused by pandemic supply chaos combined with booming demand – has transformed what had been a high-volume, low-margin trade into one with the potential for wealth-spinning deals, he says.

Automotive chip order times remain long around the world, but brokers like Pang and thousands like him are focusing on China, which has become ground zero for a crunch that the rest of the industry is gradually moving beyond.

Globally, new orders are backed up by an average of about a year, according to a Reuters survey of 100 automotive chips produced by the five leading manufacturers.

To counter the supply squeeze, global automakers like General Motors, Ford and Nissan have moved to secure better access through a playbook that has included negotiating directly with chipmakers, paying more per part and accepting more inventory.

For China though, the outlook is bleaker, according to interviews with more than 20 people involved in the trade from automakers, suppliers and brokers to experts at China’s government-affiliated auto research institute CATARC.

Despite being the world’s largest producer of cars and leader in electric vehicles (EVs), China relies almost entirely on chips imported from Europe, the United States and Taiwan. Supply strains have been compounded by a zero-COVID lockdown in auto hub Shanghai that ended last month.

As a result, the shortage is more acute than elsewhere and threatens to curb the nation’s EV momentum, according to CATARC, the China Automotive Technology and Research Center. A fledgling domestic chipmaking industry is unlikely to be in a position to cope with demand within the next two to three years, it says.

Pang, for his part, sees China’s shortage continuing through 2023 and deems it dangerous to hold inventory after that. The one risk to that view, he says: a sharper economic slowdown that could depress demand earlier.

Forecasts ‘hardly possible’

Computer chips, or semiconductors, are used in the thousands in every conventional and electric vehicle. They help control everything from deploying airbags and automating emergency braking to entertainment systems and navigation.

The Reuters survey conducted in June took a sample of chips, produced by Infineon, Texas Instruments, NXP, STMicroelectronics and Renesas, which perform a diverse range of functions in cars.

New orders via distributors are on hold for an average lead time of 49 weeks – deep into 2023, according to the analysis, which provides a snapshot of the global shortage though not a regional breakdown. Lead times range from six to 198 weeks.

German chipmaker Infineon told Reuters it is “rigorously investing and expanding manufacturing capacities worldwide” but said shortages may last until 2023 for chips outsourced to foundries.

“Since the geopolitical and macroeconomic situation has deteriorated in recent months, reliable assessments regarding the end of the present shortages are hardly possible right now,” Infineon said in a statement.

Taiwan chipmaker United Microelectronics told Reuters it has been able to reallocate some capacity to auto chips due to weaker demand in other segments. “On the whole, it is still challenging for us to meet the aggregate demand from customers,” the company said.

TrendForce analyst Galen Tseng told Reuters that if auto suppliers needed 100 PMIC chips – which regulate voltage from the battery to more than 100 applications in an average car – they were currently only getting around 80.

Urgently seeking chips

The tight supply conditions in China contrast with the improved supply outlook for global automakers. Volkswagen, for example, said in late June it expected chip shortages to ease in the second half of the year.

The chairman of Chinese EV maker Nio, William Li, said last month it was hard to predict which chips would be in short supply. Nio regularly updates its “risky chip list” to avoid shortages of any of the more than 1,000 chips needed to run production.

In late May, Chinese EV maker Xpeng Motors pleaded for chips with an online video featuring a Pokemon toy that had also sold out in China. The bobbing duck-like character waves two signs: “urgently seeking” and “chips.”

“As the car supply chain gradually recovers, this video captures our supply-chain team’s current condition,” Xpeng CEO He Xiaopeng posted on Weibo, saying his company was struggling to secure “cheap chips” needed to build cars.

All roads lead to Shenzhen

The scramble for workarounds has led automakers and suppliers to China’s main chip trading hub of Shenzhen and the “gray market,” brokered supplies legally sold but not authorized by the original manufacturer, according to two people familiar with the trade at a Chinese EV maker and an auto supplier.

The gray market carries risks because chips are sometimes recycled, improperly labeled, or stored in conditions that leave them damaged.

“Brokers are very dangerous,” said Masatsune Yamaji, research director at Gartner, adding that their prices were 10 to 20 times higher. “But in the current situation, many chip buyers need to depend on the brokers because the authorized supply chain cannot support the customers, especially the small customers in automotive or industrial electronics.”

Pang said many Shenzhen brokers were newcomers drawn by the spike in prices but unfamiliar with the technology they were buying and selling. “They only know the part number. I ask them: Do you know what this does in the car? They have no idea.”

While the volume held by brokers is hard to quantify, analysts say it is far from enough to meet demand.

“It’s not like all the chips are somewhere hidden and you just need to bring them to the market,” said Ondrej Burkacky, senior partner at McKinsey.

When supply normalizes, there may be an asset bubble in the inventories of unsold chips sitting in Shenzhen, analysts and brokers cautioned.

“We can’t hold on for too long, but the automakers can’t hold on either,” Pang said.

Chinese self-sufficiency

China, where advanced chip design and manufacturing still lag overseas rivals, is investing to decrease its reliance on foreign chips. But that will not be easy, especially given the stringent requirements for auto-grade chips.

MCUs make up about 30% of the total chip costs in a car, but they are also the hardest category for China to achieve self-sufficiency in, said Li Xudong, senior manager at CATARC, adding that domestic players had only entered the lower end of the market with chips used in air conditioning and seating controls.

“I don’t think the problem can be solved in two to three years,” CATARC chief engineer Huang Yonghe said in May. “We are relying on other countries, with 95% of the wafers imported.”

Chinese EV maker BYD, which has started to design and manufacture IGBT transistor chips, is emerging as a domestic alternative, CATARC’s Li said.

“For a long time, China has seen its inability to be totally independent on chip production as a major security weakness,” said Victor Shih, professor of political science at the University of California, San Diego.

With time, China could build a strong domestic industry as it did when it identified battery production as a national priority, Shih added.

“It led to a lot of waste, a lot of failures, but then it also led to two or three giants that now dominate the global market.”
…