China’s economy deteriorates with COVID and inflation bites

The only bright spot in the data was a 24% increase in exports but, with central banks around the world tightening monetary policies, global growth expected to slow and its relationship with the West increasingly turbulent, the China cannot turn to exports to fuel an economic recovery.

The market response to the data has been telling. Oil prices have fallen sharply – oil is now trading around $92 a barrel, down from over $98 a barrel at the end of last week – along with other commodities like copper, nickel and agricultural products. Traders clearly see the Chinese economy, and therefore its demand for commodities, fading

The reasons for the crackle within what was, for decades, a mighty economy have been well documented.

The crisis in the real estate sector is making Chinese consumers cautious and reducing their consumption.Credit:Getty

The sudden imposition of rigid debt limits on property developers imploded the real estate market which was one of the main drivers of this growth. Most major developers are on life support. Hundreds of projects are stalled and incomplete. The suppliers have not been paid and the buyers who have paid for these unbuilt apartments are revolting and refusing to honor their mortgages.

As real estate is at the heart of Chinese household wealth, the crisis in the real estate sector is making consumers cautious and reducing consumption. Efforts to stimulate consumer activity through tax incentives and easier access to credit are failing. Credit is available, but demand is minimal.

The COVID-zero policy was supposed to be refined to be more targeted earlier this year, but China’s cities and industries are still experiencing abrupt lockdowns that are adding to its citizens’ anxieties and undermining industrial activity.

The elements are not cooperating with Xi’s desire for a smooth path to his upliftment.

These influences on the economy could be attributed to policy mistakes, or at least crude execution.
China has also experienced extreme weather conditions. A drought in southern China has led to hydropower shortages, prompting power rationing and plant shutdowns to save electricity for households. Agricultural production is threatened by falling water levels in the Yangtze River. There have been massive floods in northern China.

The elements are not cooperating with Xi’s desire for a smooth path to his upliftment.

Chinese authorities have been reluctant to respond to threats to growth and financial stability posed by the housing slump, growing mortgage boycotts and COVID restrictions.
Their traditional response – large-scale infrastructure investments – has been fairly muted, perhaps because of the extent of waste in previous programs and perhaps because those programs have had diminishing impacts.

This week, however, Chinese Premier Li Keqiang urged local government leaders to adopt measures that would boost growth and consumption and provide more fiscal support through bond issues to finance investment. He also asked them to balance their COVID responses with the need to generate more economic growth.

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There were also reports on Tuesday that Beijing ordered its state-owned China Bond Insurance Co to provide credit support – to underwrite – bond issues by some of the biggest promoters to enable them to access debt markets that have been closed to them by a vague pursuit of defaults.

Whether or not this is a solution is unclear. Offshore bondholders have been burned by the implosions with deposed property giant China Evergrande and many of its peers, and a 29% plunge in property sales in July could suggest there will be little demand for new apartments even if they are built.

Property prices in China have fallen for 11 consecutive months, so even those who have pre-purchased properties will not want to resume servicing their mortgages even if the apartments are completed.

The PBOC’s decision does not presage a major downward movement in Chinese interest rates. The central bank is focused on controlling China’s relatively low inflation rate and, in any event, if there is no demand for credit, cutting interest rates has minimal effect .

He would also worry that too big a change in China’s interest rate structure could, in an environment where its monetary and fiscal policies diverge from those of the West, precipitate an exodus of foreign capital and a forced devaluation of its change.

The last thing China – or Xi – would want, on top of existing challenges, is the kind of currency crisis it experienced in 2015 when a currency devaluation forced it to burn around $320 billion. of its foreign exchange reserves to arrive at an estimate. billion US dollars in capital outflows and end the sell-off panic in its financial markets.

It would certainly spoil an already sour mood as the national convention approaches.

In a year where everything that could go wrong seems to go wrong, there won’t be much to celebrate for anyone but Xi.

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