China is experiencing a crisis of confidence, raising the danger of a full-blown crisis. However, some experts point out that the scenario may remain relatively positive, since there are also important structural strengths. Will the Asian giant draw a recovery in the ‘U’ of its GDP? The torrent of negative news coming from the Asian giant seems to have no end. Economic growth in the second quarter was a disappointment. For the first time since 2017, more investor money is flowing to the rest of Asia than to China itself.
In the conflict with the United States, there is an escalation rather than a relaxation. The share and bond prices of many property developers have plummeted, which in turn causes imbalances among other financial service providers. In the shadow banking system there are imbalances linked to the real estate market. Furthermore, the yuan has lost ground against the dollar since its peak in mid-January.
To address some of these problems, the leadership of the Chinese Communist Party presented a reform program on July 24. However, the positive response faded within a few weeks. The impression that was formed among broad sectors of the population since the end of Covid restrictions has remained. “On the one hand, it is unlikely that there will be a strong push for businesses and consumers to stimulate the economy. The government’s words are not usually followed by actions, so uncertainty will persist,” comments DWS in a detailed report about the situation in the Asian country.
Furthermore, communication by the Government itself seems inadequate; a fact that foreign observers have also noted. A clear example is the abrupt interruption of the data series showing high youth unemployment. In this way, China maintains its strengths in some high-tech industries, in the size of its domestic market, in the low indebtedness of homeowners, in the low foreign debt, as well as in the growing services and manufacturing sector. external debt.
The structural problems
Long-term challenges should be added: from the decline in the workforce to the consequences of US measures to restrict shipments of technologically important products. Also, the high levels of debt of local governments and their financing vehicles, the question of whether Beijing’s leaders are willing to give the private sector and financial markets the room for maneuver they need to establish themselves internationally, including in the areas of greater value, and allow the “new economy” to gain importance. The global challenge is posed by a Government that is once again acting in a more centralized manner, which could be detrimental.
“We do not expect the government to be willing to try to reverse the trends with massive intervention”
But China’s biggest challenge lies in the simultaneous imbalance of real estate and two closely related activities: the shadow banking system and local authority financing vehicles. According to DWS, there is the threat of a downward spiral here, the timing of which is not foreseeable, especially since a large number of homes, both completed and unfinished, are clogging the market and further eroding confidence.
The listed brick has suffered a spectacular collapse: the benchmark index has fallen almost three quarters from its peak. In the real economy, this is reflected in the rapid decline in mortgages for new home buyers: it recently fell into negative territory for the first time year-on-year. There is still no minimum in sight for either the real estate or mortgage time series.
“We expect more negative headlines from this combination of real estate, financial and confidence crises; especially because we do not expect the government to be willing to try to reverse the trends with massive intervention,” comment the management’s experts. That may be misleading for investors, but we understand that it would be counterproductive in the long term. Beijing wants to cut its stock and debt to a healthy level, although this means financial difficulties for individual companies or owners. Finding the right balance between selective reforms that build confidence and reduce systemic risks will be Beijing’s main challenge in the coming months.
The strong points are in renewables and the electric car.
Along with the risks and negative events that often take place in the country, a look at China’s strengths should be taken to provide a complete picture. The rapid increase in sales of electric cars, the expansion of renewable energy and the spread of state-of-the-art telecommunications infrastructure are just a few examples. “There are sectors that can make the country’s GDP recovery be ‘U’ shaped and not remain stagnant,” Atlantic Capital analysts describe in a recent note.
China’s biggest challenge lies in the imbalance in real estate, shadow banking and local authority financing vehicles.
From DWS they believe that the leadership of the Communist Party is willing and able to address some of the problems that the country presents. “This includes taking measures to improve the conditions of private companies, the promotion of promising industries and a reorganization of local government finances that does not depend on income from the real estate market,” he explains. But he also understands skepticism that a party leadership that recently cut back on the private sector and favored large state-owned companies has changed course. “However, the numerous challenges facing the Government mean that it is probably aware of the need for there to be no alternative to taking measures in this regard,” they say. The path has already been laid out.