The crackdown on developer leverage over the past year has blocked developers from accessing financing, leaving huge numbers of unfinished homes and, because China’s developers have operated on a pre-sale model, tens of thousands of very disgruntled homebuyers who have paid for unfinished homes Houses.
There are protests in the streets and escalating mortgage arrears and bank loan losses as these buyers refuse to service loans on properties they cannot live in. That will add to the intense pressure that exists on developers and on a sector that has historically contributed more than 30 percent to China’s growth.
The recovery towards the end of the June quarter was helped by the reopening of Shanghai, which had been in lockdown in April and May. Shanghai’s economy shrank 13.7 percent in the quarter.
This underscores how vulnerable the broader economy is to COVID outbreaks. New cases are still being reported in Shanghai, and new outbreaks and lockdowns are emerging in Henan and Guandong provinces. National daily infection numbers are at almost two-month highs.
While authorities have slightly softened their approach to COVID, Xi Jinping has made it clear that trying to stay in control of the outbreaks is his priority, even if it hurts economic growth. That tension could grow even more if Xi’s ambitions for an unprecedented third term as national leader reach their moment of truth later this year at the Communist Party’s National Congress.
The zero-COVID policy has impacted the domestic economy, triggering a significant outflow of foreign capital after last year’s sudden crackdowns in the real estate and technology sectors that left investors suffering significant losses.
This money is flowing into emerging markets and toward the safe haven US Treasury market, where yields are rising (as a result of the Federal Reserve Board’s response to inflation rising to 40-year highs and the consequent strengthening of the US dollar). Made US bonds a more attractive investment option.
So far, the authorities have refrained from massive economic stimulus packages that China launched in response to the global financial crisis in 2008.
There has been some modest but well-targeted investment in infrastructure, but concerns about the level of leverage within the economy, particularly at the local government level, have disciplined the response to the current downturn.
That might change. Beijing increased the number of bonds local governments can issue this year and had urged local authorities to issue most of the new “special” bonds by mid-year. Central authorities are reportedly considering approving another large series of bond sales — hundreds of billions of dollars in new debt — for the second half of the year.
Local governments, already heavily indebted, have been hit hard by the property sector implosions – land sales generate much of their revenue – and the initial bond sales were intended to help them stabilize and recapitalize smaller banks in their regions so they could increase revenue from loans, while the new tranches now under consideration would fund another round of infrastructure investments.
The People’s Bank of China takes a relatively conservative approach to monetary policy and does not face the inflationary pressures experienced by other major central banks (which is an indication of the weakness of the economy).
Over the weekend, however, the PBOC, citing its governor Yi Gang, said the economy was facing “some downward pressure” due to the pandemic and external factors and would seek stronger economic support.
The external environment is not favorable for China. The strongest aspect of its economy has been the recovery in its exports, but high inflation rates and tightening financial conditions are slowing global economic growth and threatening a global recession.
Greater confidence in a domestic economy experiencing a real estate crisis sending waves of distress through China’s financial system; which opens and closes in response to COVID cases and which is experiencing outflows of foreign capital at rates not seen in many years, almost dictates that China must open fiscal and monetary policy spigots if it wants to achieve a growth rate of four before that this year, not to mention the 5.5 percent target that authorities have nominated and are still meeting.
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