Nomura indicated in a report on China that it is increasingly likely that GDP growth this year will fall below the 5.0% mark. The Rhodium Group analysts stated in June that the poor state of local finances has obstructed Beijing from activation of fiscal policy to stimulate the economy. Gabriel Wildau, working as managing director at Teneo, observed in a report issued on Tuesday that a weak reaction to the collapsing housing market suggests that the top leadership has put less priority on economic growth in comparison to other aims such as security and technological autonomy which is more far-reaching than they had expected.
Economists said that with no additional stimulus, China might not be able to achieve the goal of a 5% growth rate this year. On Tuesday, the release of data regarding youth unemployment, which had recently skyrocketed to unprecedented highs, was suspended. In addition, data for July showed an overall decrease, which was exacerbated by the decline in the property market. Tao Wang, head of Asia economics and chief China economist at UBS Investment Bank, noted that if the decrease in construction persists, it will cause industrial destocking and have a negative effect on consumption. She added that if this continues, the growth target for this year might not be reached and deflationary pressures might linger. China, the second-largest economy in the world, made up for almost 18% of the global GDP in 2022, according to World Bank information.
Nomura's Chief China Economist Ting Lu and his team suggested in a report on Tuesday that Beijing should take on the role of lender of last resort to help some major developers and financial institutions in difficulty, and should be the spender of last resort to raise entire demand. Moreover, the report stated that there is a bigger risk to their predicted 4.9% y-o-y growth rate for both Q3 and Q4, and that it is very likely that the annual GDP growth rate this year will not reach the 5.0% mark.
The Chinese government has acknowledged the country's economic struggles and has indicated extra policy support. The People's Bank of China surprisingly slashed certain key rates on Tuesday. Nonetheless, the impact of these measures hasn't yet been observed and has failed to restore investor faith. Louise Loo from Oxford Economics believes this is due to the fear of contagion in the property development sector and potential defaults in the trust industry in August. Consequently, it is more difficult for stimulus plans to be successful.
Loo suggested that a potential policy change could happen in the fourth quarter, when the highly-anticipated "Third Plenum" is slated to take place. Recently, significant developer Country Garden is close to defaulting, a trend furthered by the missed payments from Zhongrong International Trust to three mainland China-listed organizations, as Wind Information reported.
Zhongrong did not give an immediate response to a request for comment from CNBC. On the 13th of August, its website had issued a warning about fraudulent claims regarding its inactivity. If all of Zhongrong's 630 billion yuan ($86.5 billion) in assets, including leverage, were in jeopardy, Xiangrong Yu, Citi's chief China economist, noted in a report that it is "not a systemically threatening number" for China's trust industry (valued at 21 trillion yuan) or its banking system (valued at 315 trillion yuan). Yu added that the trust firm and its parent company are "not as well-connected within the financial system as past entities such as Baoshang Bank and Anbang Group."
Chinese authorities started to take strict measures against real estate developers at the beginning of 2020, attempting to reduce their reliance on growth. Beijing is making defusing financial risks a top priority this year, and is in the process of shifting its financial regulatory agencies. According to a Rhodium report in June, local government debt is still substantial and cash reserves have plummeted, as localities have used their funds to purchase land to meet demands formerly provided by developers. The weaken state of regional finances inhibits Beijing from providing economic support through fiscal policy, commented Rhodium analysts.
For many, notably overseas investors, the lack of action can be seen to certify that the Chinese government has changed its priorities, moving away from an emphasis on economic growth towards priorities like national security and technological independence. Gabriel Wildau, managing director at consulting firm Teneo, stated in a report published on Tuesday that "A tepid response to the declining housing market would indicate the top leadership's reduced emphasis on economic growth is far-reaching than initially assumed." He went on to note that "Our base case is that policymakers will drastically boost housing stimulus over the coming months, which will result in rising sales and construction in the end of the year."
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China has been in a lengthy effort to enhance the long-term sustainability of its economy, moving away from investment in infrastructure and real estate and towards consumer consumption. Oxford Economics' Loo declared that policymakers must delicately balance stimulating the economy without triggering a downturn in investment and property. Going forward, she noted that the key sectors to observe are green economy sectors, digital economy, and cutting-edge and semiconductor manufacturing, as they provide the impetus for China's new growth. Loo further commented that year-to-date average growth of 7.4% in high-tech manufacturing is outpacing industrial production's 3.8%.
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