Storm clouds loom large over China’s economy | Malay Mail

BEIJING, July 17 — China’s lower-than-expected growth in the second quarter comes as the world’s second-largest economy is hit by sluggish consumption, a real estate sector in crisis and deflation worries.

Here’s a look at the main storm clouds in China’s economy:



Sluggish consumption

For nearly three years, Beijing’s strict zero-Covid policies have meant repeated lockdowns, the fear of arbitrary quarantine and other draconian health measures that have dragged down the consumer spending.

When restrictions are lifted at the end of 2022, millions flock to restaurants, shopping malls and the long-awaited holidays.

But that optimism didn’t last, with the recovery running out of steam and the labor market under pressure – more than one in five young people are unemployed.

“Companies are reluctant to hire because of weak consumer demand, and consumers are reluctant to spend” because of the economic situation, said economist Larry Hu, of investment bank Macquarie. to AFP.

“This self-fulfilled downward spiral bears some resemblance to Japan’s ‘lost decades,'” he warned, referring to years of stagnation in what is now the world’s third-largest economy.

Real estate in crisis

Bricks and mortar is a pillar of the economy in a country where property has long been seen as a safe bet for middle class Chinese seeking to grow their wealth.

That demand sent property prices soaring, as developers expanded at breakneck speed thanks to generous bank loans.

But as the debts of those companies reached unsustainable heights, the authorities pushed the brakes in 2020.

Since then, developers’ access to credit has been greatly reduced, with the most vulnerable struggling to complete their projects, fueling a crisis of confidence among potential buyers that is driving down prices.

China’s central bank last week decided to extend its support for developers, mainly through loan repayment extensions, until the end of 2024. That came after officials cut interest rates. interest last month.

But these measures are “not enough” to “save” the sector, according to Nomura bank analyst Ting Lu.

Deflation looms

For months prices in China are almost flat, but while on paper it may seem like a good thing for purchasing power, the drop in deflation will pose a long-term threat.

Instead of spending, consumers put off buying in anticipation of lower prices.

And in the absence of demand, companies cut production, freeze hiring or lay off staff and agree to further price cuts to clear their inventories, weighing on profitability as their cost remains the same.

Trade under threat

China, long described as “the factory of the world”, remains highly dependent on exports – making it vulnerable to changes in the global economy.

The threat of recession in the United States and Europe, along with rapid inflation, has weakened international demand for Chinese products.

In June, exports fell for the second month in a row.

Geopolitical tensions

Tensions between China and the United States have also hurt the economic outlook.

Washington officials are trying to “de-risk” their economy from China – including tightening restrictions on semiconductor exports in the name of national security and urging allies to do the same.

Customs spokesman Lyu Daliang last week blamed outside forces for having a “direct impact” on China’s trade.

“The risks associated with unilateralism, protectionism, and geopolitics are rising,” he said in a statement accompanying the disappointing export numbers.

Indebtedness to local authorities

The economy is also being dragged down by the dire finances of some local authorities after three years of astronomical spending to fight Covid and a real estate crisis that has deprived them of a key source of property income.

These difficulties, exacerbated by the economic context, “will become more visible in the second half of the year as China’s economic and financial problems become more apparent”, according to analysts at SinoInsider, a company based in US. — AFP

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