Despite the massive decline in home sales and despite interest rate cuts and efforts by central and local governments to ease restrictions and boost activity, the development sector remains in trouble. Last week, China’s third-largest developer Sunac missed a payment on a $742 million ($1 billion) offshore bond.
The government’s target of 5.5 percent economic growth for this year – the lowest in 30 years – is threatened without a hockey stick-like turnaround in the second half of the year. The International Monetary Fund has already lowered its forecast for China’s GDP growth to 4.4 percent and private sector forecasts are below 4 percent. There are also forecasts that the economy will contract in the June quarter.
The magnitude of the downturn in China has implications for the global economy, given the size of the economy and its importance as a major driver of global growth in recent decades.
China’s role as the world’s largest manufacturing hub means that the turmoil in its domestic logistics, including disruptions to key ports, is contributing to the supply chain problems that are a major factor in the outbreak of inflation in major economies at levels seen in the past. have not been seen for decades.
There is a very real risk of central bank-induced recessions in the US, Europe (which is also linked to an energy crisis caused by the war in Ukraine) and elsewhere. China’s economic problems add to that risk.
High single digit inflation rates in the US and Europe have led to (or in the case of Europe soon) rate hikes which will in turn negatively impact China and to some extent limit its ability to respond to its domestic challenges.
Even if the authorities throw in the political sink, as long as the zero-COVID approach remains in place, the economy is likely to remain challenged and economic conditions volatile and highly dependent on the course of the pandemic.
The yuan has fallen about 4.5 percent in value against the US dollar in just over a month, as capital pours out of China towards the increased rates now being offered in the US.
The Chinese authorities are well aware that cutting their own rates too aggressively to try to boost activity could turn the already steady outflow of capital into a full-fledged and destabilizing flight of capital.
There is little chance of China giving in to its crackdown on COVID, indeed the rollout of thousands of permanent PCR test kiosks suggests it is preparing to maintain the approach in the longer term. Citizens cannot work, shop or move unless they have a current negative test result.
The Communist Party’s quintessential 20th National Congress looms later this year, when Xi expects to see his term as leader. extended to a historic third term† Xi will not admit a policy error of such proportions, despite the social misery and economic damage it causes.
In fact, authorities deny any material social impact of the policy and downplay the severity of the lockdowns, despite images of completely empty streets in some of China’s largest cities, including Beijing and Shanghai.
China will not be able to kick-start growth unless it can generate more domestic activity and, in particular, fuel consumption and real estate market activity. Some Chinese economists have called for direct cash payments to households and there is an expectation that there will be more fiscal and monetary stimulus this year as the national congress gets closer.
China’s usual response to economic challenges is to increase infrastructure spending and this time is unlikely to be any different (which should support demand for Australian resources), even if it does little to address the structural problems facing the economy. economy is confronted.
The kind of massive and broad stimulus that China has unleashed in response to the outbreak of the pandemic in early 2020 and the financial crisis of 2008 is unlikely because of the likely impact it would have on the yuan, capital flows and inflation.
However, even if the authorities throw in the political sink, the economy is likely to remain challenged and economic conditions will remain volatile and highly dependent on the course of the pandemic as long as the zero-COVID approach remains in place.
Those are not encouraging prospects for China or the rest of the world.
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