Daily Management Review

As Negative Risks Increase, China May 'Miss The 5%' Growth Target For 2023


As Negative Risks Increase, China May 'Miss The 5%' Growth Target For 2023
Without additional assistance, economists believe China will gradually miss its 5% growth goal for this year.
The nation stopped publishing data on youth unemployment on Tuesday after it reached record highs recently. Other figures for July indicated a general slowdown, made worse by the collapse of the real estate market.
“Prolonged weakness in property construction will add to destocking pressures in the industrial space and depress consumption demand as well,” Tao Wang, head of Asia economics and chief China economist at UBS Investment Bank, said in a note.
“In such a case, economic momentum may stay subdued in the rest of the year and China may miss this year’s growth target of around 5%,” she said. “Deflation pressures could persist longer in such a scenario. The economy would then warrant much stronger or unconventional policies to revive.”
China is the world’s second-largest economy, and accounted for nearly 18% of global GDP in 2022, according to World Bank data.
Beijing should play the role of lender of last resort to support some major developers and financial institutions in trouble, and should play the role of spender of last resort to boost aggregate demand.
“In our view, Beijing should play the role of lender of last resort to support some major developers and financial institutions in trouble, and should play the role of spender of last resort to boost aggregate demand,” Nomura’s Chief China Economist Ting Lu and a team said in a report Tuesday.
“We also see bigger downside risk to our 4.9% y-o-y growth forecast for both Q3 and Q4, and it is increasingly possible that annual GDP growth this year will miss the 5.0% mark,” the report said.
Beijing has signalled increased policy assistance while acknowledging economic difficulties. On Tuesday, the People's Bank of China abruptly lowered important rates.
However, the changes need time to take hold and haven't done much to boost market confidence thus far, particularly as worrying reports increase.
“In August, contagion fears around property developers and default risk in the trust industry have also pushed sentiment lower, setting a higher bar for stimulus to be effective,” said Louise Loo, lead economist at Oxford Economics.
A more definitive change in policy may occur in the fourth quarter, when the "Third Plenum," a high-level gathering, is anticipated to take place, according to Loo.
Country Garden, a once-viable major developer, is currently on the verge of bankruptcy. According to disclosures retrieved through Wind Information, Zhongrong International Trust missed payments this month to three mainland China-listed companies.
Beijing is unable to use fiscal policy to stimulate the economy because of the existing fragility of local governments' finances.
Zhongrong made no remarks about the situation. Its website issued a warning on Aug. 13 about false claims that it could no longer operate.
It's "not a systemically threatening number" for China's 21 trillion yuan trust industry and 315 trillion yuan banking system, according to Xiangrong Yu, Citi's chief China economist, even if all of Zhongrong's 630 billion yuan ($86.5 billion) in assets — plus leverage — were in trouble.
In comparison to earlier situations like Baoshang Bank and Anbang Group, he continued, the trust company and its parent corporation are "much less connected in the financial system."
The initial crackdown by Chinese authorities on real estate developers in 2020 was an effort to reduce their heavy reliance on growth. This year, Beijing made clear that one of its top priorities is reducing financial risks. The nation is reorganising its banking regulatory authorities this year as well.
Cash levels have decreased as local government debt has remained high, according to a June Rhodium analysis. In order to meet demand that formerly came from developers, it was observed that regional authorities had invested money to buy land.
“The current weakness of localities’ finances prevents Beijing from utilizing fiscal policy to support the economy,” Rhodium analysts said.
Long-term apparent inaction may indicate that the Chinese government has significantly changed its priorities for many people, particularly foreign investors.
“A tepid response to the cratering housing market would indicate that the top leadership’s reduced emphasis on economic growth — in favor of priorities like national security and technological self-sufficiency — is more far-reaching than we anticipated,” Gabriel Wildau, managing director at consulting firm Teneo, said in a report Tuesday.
“Our base case is that policymakers will significantly escalate housing stimulus in coming months, leading to improving sales and construction volumes by year end,” Wildau said.
A large portion of China's recent problems are not entirely new. China has been engaged in a multi-year effort to increase the economy's long-term viability and move away from dependence on investment in industries like infrastructure and real estate and towards consumption.
“The challenge for policymakers is to calibrate stimulus that avoids an economic hard-landing on one hand, but that also smoothly transitions property and investments to their nascent downtrend on the other,” said Loo from Oxford Economics.
“In the years to come, China’s emerging strategic sectors — including green economy sectors, digital economy, advanced and semiconductor manufacturing — will continue to be the ones to watch as China transitions to new growth drivers,” Loo said.
She said that the average annual growth rate of 7.4% in high-tech manufacturing had surpassed the 3.8% average for industrial production so far this year.