Why China’s slowing consumption demand is an important threat

China’s key growth drivers

Real estate and construction are the two important drivers of China’s economic growth. They account for more than 20% of China’s gross domestic product (or GDP) when you also factor in cement, steel, chemicals, furniture and other related industries.

Property prices are trending south

Property prices and demand in China are trending south. New home prices dropped in 68 of the 70 state-tracked cities in August from July, according to China’s Statistics Bureau. Consequently, housing sales in China have fallen this year. They dropped 10.5% by total value in the first seven months compared with the same period a year earlier.

If China’s property market slows more than anticipated, this would have severe implications for the Chinese economy as well as resource economies reliant on China, such as Australia, Brazil, and Indonesia.

A slowdown in manufacturing

Moreover, weak manufacturing PMI readings in China over 4Q13 and 1Q14, as well as a recent dip in August, are indicating a slowing manufacturing sector. A dip in China’s manufacturing would adversely impact its own economy, affecting exchange-traded funds like the iShares China Large-Cap ETF (FXI) and the iShares MSCI Hong Kong ETF (EWH) that invest in Chinese equities.

This dip would also affect other world economies, for which China serves as a major manufacturing hub. For example, companies like Avon (AVP), General Electric (GE), and AT&T (T) have been manufacturing products in China for the last 20 to 30 years.

Declining gas demand

Adding to its economic woes, China’s gas demand growth is expected to ease to its slowest rate in three years in 2014. It should then dip again next year as an ill-timed price hike keeps gas demand below the levels forecasted by the International Energy Agency (or IEA). Also, China’s coal imports dropped for the first time this century in H1 this year.

Slowing consumption demand poses a key risk to the Chinese economy. While reforms such as a wage rise and urbanization are in place to rebalance China away from investment and towards consumption demand, we have yet to see their effect.