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Rising Economic Difficulties in China as Credit Loans Decline and Real Estate Concerns Loom

Lanon Wee

Friday's figures showed a reduction in the demand for credit by businesses and consumers. On Tuesday, analysts anticipate no change in the rate of industrial production and fixed asset investment in China from the previous month when the economic data for July is released. Over the weekend, Country Garden announced the freezing of trade in a minimum of ten of its yuan bonds traded in mainland China. China's economy is currently confronted with an array of difficulties. On Friday, the July credit report revealed a considerable decrease in the need of businesses and households for obtaining money in advance. The real estate sector issues endure with Country Garden, which was formerly flourishing, now on the threshold of default. Furthermore, consumer morale is low. Lu Ting, Chief China Economist of Nomura, and his team issued a report on Friday exhibiting that the feeble July credit statistics imply that the real estate sector is still declining, and the intensifying international affairs bring about uneasiness. In comparison to Japan in the 1990s, companies and individuals are reducing their borrowing not because of solvency but due to the shortage of assurance. Local bank credit issued in the Chinese yuan currency plummeted in July, with 345.9 billion yuan ($47.64 billion) issued – 89 per cent lower than the month prior. This figure was much lower than the 800 billion yuan analyst polled by Reuters had forecast. It is also the lowest level since late 2009. Nevertheless, Citi Chief China Economist Xiangrong Yu and his team believe that policy implementations in June could contribute to a reversal in this trend, noting that the numbers "should mark a low". The analysts stated that the various factors cannot hide the lack of credit demand and risk-aversion, expecting interest rate cuts by the month's end. If these reductions do not take place, they predict China might possibly fail to meet its expected 5% growth. Tuesday will give China's July economic reports, with Industrial production and Fixed Asset Investment estimated to stay the same from June while Retail Sales might increase to a 4.7% YOY rate. China's real estate sector, where the majority of household wealth is located, is starting to worry analysts because it could lead to a broader economic decline. On the weekend, developer Country Garden declared that trading on at least 10 of its mainland China bonds had stopped. Reuters reported that two U.S. dollar-denominated bonds of the company had failed to make coupon payments last week. Goldman Sachs' analysis revealed that Country Garden's U.S. dollar bonds make up about half of all the outstanding high-yield U.S. dollar-denominated bonds. Of the total numbers of investment grade U.S. dollar bonds in China, 43% belongs to the company. "Since most high-yield developers have either failed to fulfill their promises or had to do bond exchanges, we are of the opinion that the rising tension among the remaining high-yield developers should not cause a great impact on the offshore bond market," Goldman analysts noted in a document from Friday. "However, greater worries should be directed towards any potential spillover effect to investment grade developers, a lot of which are state owned businesses [SOEs]." State-owned companies in China have seen greater success in terms of loan acquisition, due in part to the prevalence of state-owned banks. Furthermore, statistics indicate that state-owned developers have fared better than non-state-owned ones in recent sales.However, according to Louis Lau, director of investments and emerging markets portfolio manager at Brandes Investment Partners, there is still a gap between China and other developed countries. He noted that while real estate has contributed around 30% to China's GDP, countries such as Japan and South Korea have seen the industry make a contribution on the lower end of the 20 percentage points. People can get more information about China from CNBC Pro--Goldman has identified stocks from China that they believe will surge, with two of them making it onto a list of their highest-rated picks. Additionally, Morgan Stanley has identified six of their top China stocks, including a chipmaker that they are expecting to jump by 80%. It's worth noting what China's unwavering shoppers are buying and the stocks that will benefit from such purchases. Last, but certainly not least, the battle to dominate the market in chips is beginning to heat up, and a certain Chinese stock rose 30% in only five days. Goldman Sachs has pinpointed the China stocks it now sees as having the potential to rebound -- and two of those are rated as top buy picks. Meanwhile, Morgan Stanley has highlighted 6 of its top picks for the Chinese market, predicting that one chipmaker in particular could increase in value by 80%. Furthermore, it has become clear what the Chinese population's resilient spending habits have been driving -- and the stocks that are benefiting from it. The battle for chip supremacy is also intensifying, with one Chinese stock having jumped 30% in a period of five days. Beijing kicked off a serious campaign in 2020 to tackle developers' over-reliance on debt for growth. Although authorities have toned down their stance lately, most notably in late July, they have not launched any major stimulus. Lau expressed his opinion that “the more the government helps out the real estate industry, the longer it will take for it to find an appropriate floor”. He is not bullish on China in general, but will pick individual consumer names and industries he believes have the potential to outperform.

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