China’s economy needs more support as ownership and tech restrictions take their toll

Economists play down the idea that the scale of China Evergrande Group’s problems represents a ‘Lehman moment’ in terms of global contagion risks, but it has certainly complicated matters for policymakers in Beijing.

Some analysts say increased policy support for China’s economy, including an increase in banks’ lending power, is likely to dispel the gloom over property chilling measures, a surge in regulatory vigor and the woes of the China Evergrande group.

“China’s real estate sector and overall economy will slow significantly, credit risks will rise further, and there is a growing need for Beijing to step up policy support,” Nomura analysts wrote this week amid fears of a default of the second Chinese real estate developer. shook global markets.

Economists play down the idea that the scale of Evergrande’s problems represents a “Lehman moment” in terms of global contagion risks, but it has certainly complicated matters for policymakers in Beijing. They have tried to rein in rampant borrowing and prevent an asset bubble in real estate, which accounts for around a quarter of China’s economy and is a key driver of demand for materials including concrete and steel. .

Reiterating that “housing is for living in, not for speculation”, authorities have limited developers’ debt ratios and access to loans and restricted home purchases.

At the same time, regulatory pressure in several sectors in the name of President Xi Jinping’s “common prosperity” push, including the banning of many private lessons and the limitation of online gambling for minors, has increased the uncertainty for businesses and upheaval in stock markets.

Many analysts expect a further reduction in the amount of cash banks must hold in reserve later this year, following a reduction in July, although comments from officials earlier this month dampened expectations. imminent easing.

“With the economy faltering and concerns growing around the real estate sector, we believe PBOC policy rate cuts could come as early as next month,” Capital Economics wrote on Wednesday, September 22, referring to the People’s Bank of China.

Other analysts believe a reduction is possible but unlikely before the end of the year.

China maintained its benchmark lending rate for business and household loans for the 17th straight month at its September setting.

China’s economy revived after a coronavirus-induced crisis in 2020, but activity has recently fallen due to regulatory measures, supply bottlenecks and restrictions related to localized outbreaks of COVID-19 .

Bank of America cut its China growth forecast for this year on Tuesday, September 21, to 8% from 8.3%, and its forecast for 2022 to 5.3% from 6.2%.

Home prices slow, new construction falls, lending weakens

More than 20 cities tightened restrictions on the real estate sector in August, when house prices in China posted the slowest monthly rise since December. New property starts in the first eight months fell 3.2% from a year earlier.

“The housing down cycle could lead to increased pressure on growth next year, when the policy focus could shift from regulation to policy backers to defend the 5% growth bottom line,” said Larry Hu of Macquarie, in a note.

Investors should look to China’s Politburo meeting in December for signals on next year’s priorities, he added.

A flurry of new regulations in technology and education has dampened business and wiped hundreds of billions of dollars from corporate valuations.

Weak loan growth in August was likely due in part to regulatory repression, Iris Pang, chief economist for Greater China at ING, said in a note.

Some companies don’t take out loans when they reconsider their investments or find banks unwilling to take the risk amid uncertainty, she said.

The crackdown on the education and tech sectors also added unusually bad services activity data for August, ING’s Pang said.

Last month, Reuters reported that TikTok owner Bytedance told employees it planned to lay off staff in its education business and close some tutoring operations. Juren Education Group, in the after-school tutoring business, announced earlier this month that it would close.

Services sector activity fell into a sharp contraction in August for the first time since the depths of the pandemic in February last year, mainly due to COVID-19 restrictions. –

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