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Five months after Chinese President Xi Jinping declared victory over the pandemic and relaxed tight social controls, new data this week showed the country’s economy was far from returning to full health.
While consumers are stepping out to spend, buyers are avoiding property, one of the central growth drivers of the Chinese economy. Exports, another important engine, are flagging as high inflation abroad reduces demand for Chinese goods.
The government has already started cutting interest rates, but analysts say a fiscal rather than monetary stimulus will be needed to keep recovery in the world’s second-largest economy on track. Here are the sectors putting the most pressure on the economy as well as the ones whose outlook is bright – and the options policymakers have to revive growth.
property warning sign
According to analysts, China’s property sector, which accounts for about 30 per cent of its economic output, is at the root of the economic malaise. “It is not an exaggeration to say that assets are jeopardizing the entire economic recovery at this point,” said Chris Beddore, deputy director of China research at Gawkel Dragonomics.
Consumers are skeptical about the sector. Many bought flats before the buildings were constructed, only to find that the properties were not delivered after a regulatory crackdown on leverage levels sent many developers into default.
The real estate market showed signs of stabilization in the first quarter after a long slump, but has started declining again in recent weeks.
Gavekal said sales, new project starts and floor space under construction all declined in May, when measured as a share of seasonally adjusted pre-pandemic 2019 levels. The research group said the completion rate slowed to 24 percent year over year from 42 percent a month ago.
The government is expected next week to cut the five-year lending rate, which is used to benchmark mortgages, but analysts say more measures are needed to revive the sector, such as cash Incentives including reduction in credit and mortgage down payments for strapped developers.
exports slow dramatically
Exports fell 7.5 percent in US dollar terms last month after rising 8.5 percent in April, as slowing growth overseas hurt demand, a vital lifeline for the Chinese economy during the depth of the pandemic .
Analysts said the weakness in exports and assets may have also impacted industrial production, which contracted in May. To top it off, private real estate investment also turned negative for the first time in more than a decade – with the exception of the start of the pandemic in 2020 – indicating that businesses were not investing.
“At the moment the manufacturing sector is not on its feet and exports are bad,” said Rob Carnell, Asia-Pacific head of research at ING. He said there could be a structural shift, with US export restrictions on high-tech goods, especially semiconductor components and chipmaking equipment, affecting China’s trade with regional powerhouses such as South Korea, Japan and Taiwan.
Policymakers may choose to encourage trade by tolerating a weaker renminbi. Low interest rates will support that strategy – after the People’s Bank of China cut its key policy rate on Thursday, the currency fell 0.3 percent to a six-month low of Rmb7.1807 against the dollar, putting it down nearly 4 . percent year so far.
Retailing is a ray of hope
Economists said the best hope for reviving growth in the economy is to spur strong domestic demand, which will lead to a tighter job market, higher wages and eventually a resurgence of confidence that could spread to property and manufacturing.
Retail sales expanded 12.7 percent year over year as troubled consumers returned to stores after last year’s tough pandemic restrictions. But economists said that on a seasonally-adjusted basis, the gauge fell month-on-month, as a boost from reopenings began to fade. Catering was the strongest component, followed by automotive purchases, policy incentives and rebates.
infrastructure loses momentum
According to economists, infrastructure investment grew by 8.8 per cent year-on-year in May. But the gauge also fell below last year, when it was growing at 10 percent, and growth in the segment may not have been strong enough to offset weakness in assets and exports, analysts warned.
“The pace of investment in infrastructure is slowing,” said Michel Lam, great China economist at Societe Generale, which he attributed to “very weak land sales from local governments.”
Economists said Beijing would need to resort to infrastructure to spur growth, suggesting policymakers could open up local government special bonds (LGSBs) to boost investment.
Nomura analysts estimate this could amount to an additional Rmb500bn ($70bn) from LGSBs, on top of the unused portion of this year’s annual quota of Rmb1.86tn. The bank also noted that Beijing may consider issuing special central government bonds to raise additional funds.
no ‘bazooka’ expected
China’s economic boom is fragile – a challenge the government itself has acknowledged. The National Bureau of Statistics said this week that “the foundation for the economic recovery is not yet solid.”
More stimulus will be needed to bring growth back to pre-pandemic levels, and the central bank is expected to cut rates further, which will be accompanied by tax breaks and other support for small businesses.
Tao Wang, chief China economist at UBS, said the government should prioritize giving a floor to the asset sector under crisis. “Otherwise it is very difficult to stabilize the economy as a whole,” he warned.
Despite significant obstacles to recovery, there is some hope for a “Big Bang” style stimulus.
In the past, China has invested in the property sector to recover from recession. But Beijing has long made clear its approach that “houses are for living in, not speculation”, dampening hopes of a glut of activity in the area to spur growth.
“‘Bazooka’ policies in the past have generally ended up helping the property development sector and I don’t think Xi wants to do that,” said ING’s Carnell.
Five months after Chinese President Xi Jinping declared victory over the pandemic and relaxed tight social controls, new data this week showed the country’s economy was far from returning to full health.
While consumers are stepping out to spend, buyers are avoiding property, one of the central growth drivers of the Chinese economy. Exports, another important engine, are flagging as high inflation abroad reduces demand for Chinese goods.
The government has already started cutting interest rates, but analysts say a fiscal rather than monetary stimulus will be needed to keep recovery in the world’s second-largest economy on track. Here are the sectors putting the most pressure on the economy as well as the ones whose outlook is bright – and the options policymakers have to revive growth.
property warning sign
According to analysts, China’s property sector, which accounts for about 30 per cent of its economic output, is at the root of the economic malaise. “It is not an exaggeration to say that assets are jeopardizing the entire economic recovery at this point,” said Chris Beddore, deputy director of China research at Gawkel Dragonomics.
Consumers are skeptical about the sector. Many bought flats before the buildings were constructed, only to find that the properties were not delivered after a regulatory crackdown on leverage levels sent many developers into default.
The real estate market showed signs of stabilization in the first quarter after a long slump, but has started declining again in recent weeks.
Gavekal said sales, new project starts and floor space under construction all declined in May, when measured as a share of seasonally adjusted pre-pandemic 2019 levels. The research group said the completion rate slowed to 24 percent year over year from 42 percent a month ago.
The government is expected next week to cut the five-year lending rate, which is used to benchmark mortgages, but analysts say more measures are needed to revive the sector, such as cash Incentives including reduction in credit and mortgage down payments for strapped developers.
exports slow dramatically
Exports fell 7.5 percent in US dollar terms last month after rising 8.5 percent in April, as slowing growth overseas hurt demand, a vital lifeline for the Chinese economy during the depth of the pandemic .
Analysts said the weakness in exports and assets may have also impacted industrial production, which contracted in May. To top it off, private real estate investment also turned negative for the first time in more than a decade – with the exception of the start of the pandemic in 2020 – indicating that businesses were not investing.
“At the moment the manufacturing sector is not on its feet and exports are bad,” said Rob Carnell, Asia-Pacific head of research at ING. He said there could be a structural shift, with US export restrictions on high-tech goods, especially semiconductor components and chipmaking equipment, affecting China’s trade with regional powerhouses such as South Korea, Japan and Taiwan.
Policymakers may choose to encourage trade by tolerating a weaker renminbi. Low interest rates will support that strategy – after the People’s Bank of China cut its key policy rate on Thursday, the currency fell 0.3 percent to a six-month low of Rmb7.1807 against the dollar, putting it down nearly 4 . percent year so far.
Retailing is a ray of hope
Economists said the best hope for reviving growth in the economy is to spur strong domestic demand, which will lead to a tighter job market, higher wages and eventually a resurgence of confidence that could spread to property and manufacturing.
Retail sales expanded 12.7 percent year over year as troubled consumers returned to stores after last year’s tough pandemic restrictions. But economists said that on a seasonally-adjusted basis, the gauge fell month-on-month, as a boost from reopenings began to fade. Catering was the strongest component, followed by automotive purchases, policy incentives and rebates.
infrastructure loses momentum
According to economists, infrastructure investment grew by 8.8 per cent year-on-year in May. But the gauge also fell below last year, when it was growing at 10 percent, and growth in the segment may not have been strong enough to offset weakness in assets and exports, analysts warned.
“The pace of investment in infrastructure is slowing,” said Michel Lam, great China economist at Societe Generale, which he attributed to “very weak land sales from local governments.”
Economists said Beijing would need to resort to infrastructure to spur growth, suggesting policymakers could open up local government special bonds (LGSBs) to boost investment.
Nomura analysts estimate this could amount to an additional Rmb500bn ($70bn) from LGSBs, on top of the unused portion of this year’s annual quota of Rmb1.86tn. The bank also noted that Beijing may consider issuing special central government bonds to raise additional funds.
no ‘bazooka’ expected
China’s economic boom is fragile – a challenge the government itself has acknowledged. The National Bureau of Statistics said this week that “the foundation for the economic recovery is not yet solid.”
More stimulus will be needed to bring growth back to pre-pandemic levels, and the central bank is expected to cut rates further, which will be accompanied by tax breaks and other support for small businesses.
Tao Wang, chief China economist at UBS, said the government should prioritize giving a floor to the asset sector under crisis. “Otherwise it is very difficult to stabilize the economy as a whole,” he warned.
Despite significant obstacles to recovery, there is some hope for a “Big Bang” style stimulus.
In the past, China has invested in the property sector to recover from recession. But Beijing has long made clear its approach that “houses are for living in, not speculation”, dampening hopes of a glut of activity in the area to spur growth.
“‘Bazooka’ policies in the past have generally ended up helping the property development sector and I don’t think Xi wants to do that,” said ING’s Carnell.
