Careful navigation: A worker producing containers at a factory in Nantong, China. Economists are watching with an eagle eye how the government handles the coronavirus outbreaks and property market. — AFP
SHANGHAI: China’s economic outlook for the second half of this year will be determined by the government’s shaky control over coronavirus outbreaks and the property market.
Early signs look negative. Daily covid cases have risen to the highest level since May, leading to more local lockdowns.
In addition, a mortgage strike in dozens of cities is increasing households’ awareness of property developers’ inability to complete housing projects, potentially triggering a further downward spiral in the vast sector.
After growth almost ground to a halt in the second quarter, the bearish outlook has economists lowering their full-year forecasts closer to 3%, well below the government’s target of about 5.5%.
That is yet another drag for a world economy grappling with the fastest inflation in decades, war in Europe and the ongoing Covid pandemic, and comes as the International Monetary Fund is set to “substantially” cut its global economic growth outlook.
China’s gross domestic product (GDP) growth of just 0.4% in the second quarter was the second lowest ever recorded. The biggest cause was lockdowns in dozens of cities in the spring to stop the spread of the omicron coronavirus variant.
“Nothing can be worse than the large-scale city lockdowns and the halt of economic activities,” said Gary Ng, economist at Natixis SA.
China is subject to a “Covid Business Cycle (CBC),” Nomura Holdings Inc economists argued in a recent note.
First, increasing cases trigger business closures. Once cases come down, government stimulus leads activity to rebound, possibly leading to a new surge in Covid cases.
With new variants such as BA.5 recently detected in several cities, the pace and length of lockdowns is deeply unpredictable.
“The duration and severity of CBCs appear quite random due to the uncertain nature of Covid-19,” the economists led by Lu Ting added. “We believe markets have become overly optimistic about growth” in the second half.
On the upside, Chinese local governments are increasingly adept at maintaining factory and freight transport activity through lockdowns.
President Xi Jinping has urged officials to stick with Covid-zero, but last week struck a more conciliatory tone, telling officials to “reduce inconvenience in people’s everyday life,” while enforcing the policy.
“I expect that the Chinese government will respond to a rise in Covid cases with narrower, localised lockdowns, rather than the city-wide lockdowns used in April and May, in order to avoid severe disruptions to the gradual economic recovery now underway,” Andy Rothman, an investment strategist at Matthews Asia, said in a note.
The slump in China’s vast property market, which powers demand for goods and services worth around 20% of GDP, worsened in the second quarter. That was partly due to lockdowns which hit household incomes and made them less willing to buy homes.
There are risks that the longer the property downturn goes on, the more it becomes self-reinforcing and so could continue even if lockdowns decrease. The latest warning sign is the mortgage boycott in dozens of cities, which as well as rattling the banking sector is sending a clear message to prospective house buyers that their homes may not be delivered on time.
Economists are watching for signs that Beijing will take stronger measures to support housing, which could include a large cut in mortgage interest rates, or a clear sign that bank loans to property developers are increasing.
The central bank will cut its policy lending rate by 10 basis points, influencing mortgages and cut bank reserve requirements by 50 basis points, according to TS Lombard.
China may approve an unprecedented amount of local government bond sales that would make 7.2 trillion yuan (RM4.9 trillion) available for infrastructure investment this year, sources have told Bloomberg. That could boost employment and household spending.
The problem is that Covid lockdowns and the property market slump mean that while local governments can get extra funding from bond sales, their traditional tax and land sales revenue is slumping.
That caused a 2.7 trillion yuan (RM1.8 trillion) revenue shortfall in the first half of the year, according to UBS Group AG economist Wang Tao.
She called for the central government to consider issuing one trillion yuan (RM660bil) of special bonds to support the budget. Without new support measures, China may struggle to grow 3% for the full year, she said.
The weather is also a wild card. China has experienced record temperatures and floods in recent weeks, leading to construction halts.
Consumption has been the main component of growth in China for most of the last decade, so it’s crucial that households get spending again.
Investment by private businesses is generally larger than infrastructure investment, so business confidence matters too.
But sentiment is close to record lows. A survey by China’s central bank in the second quarter showed household employment expectations at the lowest since 2009, while the share of households intending to save more rose to 58%, compared with pre-pandemic levels of 46%. — Bloomberg
