China’s economy is facing a number of difficulties, from weak credit demand to persistent problems in the real estate industry. Recent credit numbers for July show a fall in borrowing for future investments from both enterprises and families. In particular, ongoing real estate issues are notable, with major developer Country Garden teetering on the brink of bankruptcy. Additionally, consumer sentiment is still muted.
Due to geopolitical tensions and uncertainty, experts are constantly monitoring these events. The issues have been emphasized by Lu Ting, Chief China Economist at Nomura, as being exacerbated by the property market’s downward trend and the current tense geopolitical environment.
Chief China Economist at Citi, Xiangrong Yu, noted the market’s general risk aversion as well as the sharp decline in loan demand. In July compared to June, new local currency bank loans fell by 89%, dramatically undershooting experts’ predictions. This drop in loan demand emphasizes the general lack of confidence among families and businesses.
Expectations for rate reductions by the end of September are growing in reaction to these difficulties. Analysts claim that without these rate reductions, there is a bigger chance that China won’t meet its annual growth objective of around 5%.
Due to its potential to negatively impact the performance of the whole economy, the real estate sector—a significant part of China’s economy—has grown to be of concern. A well-known developer named Country Garden recently stopped selling many of its mainland-China traded yuan bonds. Missed coupon payments on dollar-denominated bonds have further increased worries about the soundness of the real estate sector.
Due to the dominance of state-owned banks, China’s state-owned businesses have typically found it simpler to get loans; nonetheless, the total real estate industry still needs to decline in order to reach a sustainable level. Beijing started making measures to reduce the sector’s dependence on debt in 2020, but problems still exist. When the real estate sector will establish a solid foundation is being questioned in light of the government’s initiatives to assist it.
Considering these difficulties, investors are using cautious tactics. The longer the government takes to help the real estate sector recover to a fair level, Louis Lau, Director of Investments and Emerging Markets Portfolio Manager at Brandes Investment Partners, said. Lau continues to be underweight on China while making strategic investments in up-and-coming consumer brands and sectors.
The cautious mood permeating the market as China’s economy navigates a number of difficulties points to the necessity for a balanced strategy in tackling the many worries, notably those relating to loan demand and the real estate industry.
