Asian markets struggled on Thursday as mounting concerns over China’s sluggish economic performance rippled through the region, dragging down stock indices from Japan to South Korea. This downturn, influenced by China’s economic pressures and policy adjustments, was compounded by a strong U.S. dollar and rising bond yields as investors braced for potential shifts in U.S. monetary policy. Adding to the mix, the anticipation of Donald Trump’s return to the White House has reignited discussions on inflation, trade tariffs, and the future direction of global economic policy.
Despite efforts by the Chinese government to bolster growth through stimulus measures, China’s economy has faced a slowing momentum due to complex internal and external factors. While official data suggested that some growth measures showed improvement last month, particularly with efforts to boost liquidity and stimulate spending, the underlying economic conditions continue to drag. The recent decline in China’s manufacturing output, consumer demand, and real estate investment has weakened confidence in both the domestic and regional markets.
In particular, the Shanghai Composite Index fell as investors reacted to concerns over industrial output and weakening property investment, which have long been major contributors to China’s GDP. With other markets in Asia—such as the Nikkei 225 and the Hang Seng Index—heavily influenced by China’s performance, the regional impact has been profound.
In an attempt to address both economic and energy challenges, Zhejiang province, one of China’s industrial powerhouses, is set to introduce significant reforms in its power market. Aiming to encourage market-driven mechanisms, Zhejiang’s proposal opens a small portion (10%) of its energy market to spot trading, creating a competitive landscape where renewable sources like wind and solar can compete directly with coal-fired power plants.
While government-regulated contracts will continue to control 90% of the market, this 10% experiment could have far-reaching effects if successful. If the spot market stabilizes prices during high demand and ensures efficient distribution of renewables, it could lead to further liberalization. For now, the initiative serves as a test case, with implications for other provinces that may follow in Zhejiang’s footsteps. Shannon Dong, an analyst at BloombergNEF, noted, “Zhejiang’s latest initiatives align with the broader market trend of pushing commercial and industrial solar projects to participate in the power market.” This move supports China’s overall goal of increasing renewable energy’s role in the power mix, though challenges in grid integration and transmission persist.
Zhejiang’s initiative to expand spot trading aligns with China’s broader ambition of establishing a national power market by 2030. Under this plan, China aims to integrate its fragmented energy markets, allowing electricity to be traded nationwide in near real-time. This would enable renewable energy from wind- and solar-rich regions to be channeled effectively to high-demand areas, tackling one of the biggest hurdles in China’s energy transition.
Yet, challenges remain in bridging the geographical and infrastructural gaps that fragment the Chinese energy market. While renewables like solar and wind have become cost-competitive compared to traditional power sources, they are intermittent, limited by seasonal and weather fluctuations, and dependent on a robust transmission infrastructure. For now, Zhejiang’s efforts serve as a pilot in establishing price-setting mechanisms and stabilizing power supplies, especially during periods of peak demand.
Although Zhejiang’s approach is being closely watched, it isn’t the first time a Chinese province has ventured into power market liberalization. In Guangdong, another key manufacturing hub, initial experiments with market-driven power pricing encountered significant challenges. Nearly half of Guangdong’s power suppliers struggled financially as rates fell below production costs, underscoring the complexities of transitioning to a more market-based system without destabilizing existing players.
This experience highlights the challenges of balancing free-market pricing with cost stability for power providers. Such lessons will be crucial for Zhejiang’s policymakers, as well as those designing the planned national market, in ensuring a smooth transition that doesn’t compromise energy security or supply predictability.
In the U.S., the bond market saw yields rise in response to economic data and signals of a potential policy shift under Trump’s renewed presidency. Investors are monitoring the Federal Reserve’s stance on interest rates and inflation control, with expectations that Trump’s administration might prioritize policies that increase domestic production, potentially at the expense of free trade. His administration’s track record of imposing tariffs, particularly on China, has already impacted global trade dynamics, and there is speculation about a similar policy direction after he assumes office in early 2025.
With bond yields on the rise, the U.S. dollar has strengthened, attracting investors seeking stability amidst global uncertainties. However, a stronger dollar poses challenges for emerging markets, particularly in Asia, where high levels of debt denominated in dollars make economies vulnerable to shifts in U.S. monetary policy.
The copper market, heavily influenced by demand from both the U.S. and China, has also felt the effects of recent economic uncertainty. Citigroup Inc. recently cut its short-term outlook for copper prices by 11%, citing potential trade tensions and the possibility of renewed tariffs under a Trump administration as key factors. China’s slowing demand, alongside expected pressure from Trump’s trade policies, has cast a shadow on future growth for copper suppliers.
At Asia Copper Week in Shanghai and the CRU World Copper Conference Asia, industry leaders are voicing concerns over declining Chinese demand, which has been further exacerbated by an economic slowdown and a shift towards renewable energy and electric vehicles. As China increasingly relies on domestically sourced energy, copper’s role in grid infrastructure remains critical, but the immediate demand from industrial projects has shown signs of weakening.
As Chinese oil demand stagnates, largely due to its economic slowdown and rising adoption of electric vehicles, India has emerged as the leading driver of oil demand growth in Asia. This shift underscores India’s expanding industrial base and growing consumer market. According to forecasts from the U.S. Energy Information Administration (EIA), India’s oil demand will continue to rise as its economy expands, despite global pressures to move toward greener alternatives.
For global oil producers, India’s rise as an energy consumer provides new opportunities to balance the decline in Chinese demand, as the country seeks reliable, affordable energy sources to fuel its growth.
In an unexpected development, BRF SA, one of the world’s largest chicken producers, sees potential gains for Brazil amidst ongoing trade tensions between the U.S. and China. With Trump set to reintroduce tariffs, countries like Brazil could capitalize on increased Chinese demand for agricultural goods, filling the gap left by U.S. suppliers. Brazil has already been expanding its role as a food supplier to China, and a renewed trade conflict would only solidify this partnership.
This dynamic serves as a reminder of the complex, interwoven relationships in the global trade system, where shifts in policy in one region can have cascading effects across continents.
A series of economic indicators released in October provided mixed insights into China’s economic health. Industrial output, including steel, aluminum, coal, and gas, as well as crude oil refining, all showed modest gains, reflecting partial success of recent stimulus measures. However, the real estate sector continued to struggle, with declines in both property investment and residential sales contributing to concerns over economic stability.
Retail sales and fixed asset investment indicated slow growth, while the unemployment rate remained stable, offering a glimmer of hope amidst otherwise lukewarm data. Investors are closely monitoring these indicators, particularly as China continues to introduce policies aimed at maintaining economic stability.
