US manufacturing orders in China have declined by 40% and many Chinese factories have already shut down for the lunar new year. Rising interest rates in the US are, meanwhile, contributing to the slowdown in China. It all spells trouble for Mongolia. That’s right: when China sneezes, Mongolia’s economy catches a cold.

China purchases more than 80% of Mongolia’s exports, mostly raw materials such as coal and metals. Its demand for these raw materials accounts for more than 40% of Mongolia’s economy. With Beijing’s “Zero-covid” curbs, inflation, increased gasoline and transportation costs and declining demand seen around the world, China’s imports are trending downwards. It’s bad news for a Mongolian economy still not fully recovered from nearly three years of covid lockdowns.

The Chinese border first closed due to covid in January 2020. It was still closed in 2021, restricting both imports from, and exports to, Mongolia. As a result, the Mongolian economy shrank by 4.4%.

In 2022, the Chinese border was largely kept open, but the general economic situation in the world combined with China’s ongoing covid lockdowns caused Chinese imports to fall by 10.6% y/y in November, marking the biggest decline since May 2020. 

At the same time, China’s exports fell 8.7% y/y. Declining local demand in China as well as reduced demand in foreign countries is causing an obvious contraction in China’s manufacturing and export sectors. With less factory activity, imports of raw materials are down. Mongolia’s inability to export its raw materials combined with reduced domestic demand has caused the country’s inventories to reach 13.4% of GDP.

As Mongolia approached the last month of 2022, its year-to-date export of iron ore was down around 24%. For gold the decline was 14%, for petroleum almost 50% and for fluorite 45%. Generally, when the Chinese economy is facing a contraction, the government invests in infrastructure projects. They create demand for fluorite, iron, copper and other materials used in construction. However, China’s overall construction sector is trending downwards and new housing construction has been down 40%-50% since 2021. With Beijing facing debt equal to around 300% of GDP, it is questionable whether China will be able to spend its way out of its current economic situation.

China alone accounts for so much of the world’s total demand for commodities that a slump in the Middle Kingdom causes prices to plummet. For example, the world price for copper dropped by about 30% from March to towards the end of 2022. Consequently, Mongolia’s copper revenues were down 34%.

Freight costs have been rising since the spread of covid started in earnest. This increases the cost of Mongolia’s exports, particularly for coal, which is sold at $268/tonne. With commodity prices declining and costs rising, profits are down in Mongolia. And with exports down, but imports from China recovering, more dollars are flowing out of Mongolia than are coming in. Mongolia’s FX reserves are thus in caught in a steady decline. Bank of Mongolia’s foreign currency reserves have in fact been in decline since July 2021. In August 2022, they were down 40% compared to 2021.  

In August, Asian Development Bank (ADB) approved a $100mn emergency loan for Mongolia to help the country survive the current economic situation. This will add to the nation’s foreign debt, which already stands at 220% of GDP. Mongolia’s sovereign debt, issued in dollars as bonds, is at the same time dropping in value on world markets. Even worse, $140mn of sovereign debt was due in December and needed to be paid off. Next year, an additional $1.2 billion of Mongolia’s debt will reach maturity and will have to be repaid

Mongolia’s current account deficit by December was $2.2bn, fuelling predictions that Mongolia’s economic downturn could be prolonged. ADB has lowered its growth expectations for Mongolia’s 2022 GDP from 2.3% to 1.7%.

Mongolia’s covid-related economic recovery has been slow, yet employment declined by 5% in 2021. This year, the country’s companies are struggling with higher prices for imports including gasoline. Demand from China is down so there is less money coming in and the country is suffering from inflation of about 14.5% this year. A perfect storm is gathering. Ordinary families are suffering.

Saruul Tumurbaatar, a 28-year-old recruitment consultant in Ulaanbaatar, told how the economic situation was affecting the average person. “My outlook on my life has changed since covid started. The economic crises have caused a lot of issues such as mental and physical issues for people who have lost their jobs or who are low-income. All of these issues, including inflation growth, mismanagement of the government, unemployment and gasoline price changes have been affecting many Mongolian families mentally and physically.”