China is facing a “downward economic spiral” amid a mounting crisis in its debt-laden property sector, analysts have warned.
Seven City banks slashed their growth forecasts for the world’s second-largest economy on Monday after what was dubbed “disappointing” and “piecemeal” support measures from the central bank.
It comes amid growing concerns about a crisis in China’s huge property sector, which is struggling under the weight of huge debts as interest rates rise. A crunch in the industry has hit growth and contributed to the country falling into deflation. A fifth of young people are also out of work.
Economists at Zurich said in a note: “China’s downward economic spiral continues, with the property market at its core.”
“We see an urgent need for more convincing, proactive government support to tackle the vicious cycle.”
In the US, government borrowing costs surged to a fresh 16-year high on Monday amid fears of higher interest rates and the potential repercussions of a slowdown in China.
The spur for more pessimism was an interest rate cut from China’s central bank.
Officials reduced one of China’s key lending rates on Monday but kept another on hold, disappointing economists who believe much larger cuts are needed to revive demand and boost consumer confidence.
Tao Wang, an economist at UBS, said: “The government’s policy support has arguably been less than was indicated earlier in the year, and less than we expected.”
UBS cut their growth forecasts for China from 5.2pc to 4.8pc this year, and from 5pc to 4.2pc next year.
Citi, Morgan Stanley, Barclays, JPMorgan, Deutsche Bank and Nomura also all cut their predictions.
President Xi Jinping’s 5pc target, set out in March, was already the lowest growth target in decades.
China’s economy has been struggling with a disappointing rebound from its brutal pandemic lockdowns, which only came to an end late last year.
It has now lurched towards a property crisis after a second major developer ran into trouble. Country Garden, the Chinese property giant, is facing default after missing payments to dollar bondholders.
Ms Wang said she now expected new property construction projects in China to fall by 25pc this year, with another 10pc drop earmarked in 2024.
She said: “The property downturn has deepened, external demand has weakened further and policy support has been less than expected.
“Since an estimated 60pc or more of household wealth is allocated in property, a weaker property market is also expected to soften household consumption.”
The People’s Bank of China on Monday cut the one-year prime loan rate, to which a large share of mortgages and business loans are tied, by 0.1 percentage points. This was less than economists had expected.
Meanwhile, officials held the five-year loan rate steady.
Hong Kong’s Hang Seng stock index dropped 1.8pc on the news, extending its losing run to seven trading days.
Economists at Zurich said the small rate cut was “disappointing, while fiscal support and measures to spur consumption appear rather piecemeal”.
Xiangrong Yu, an economist at Citi, said the bank had specifically downgraded its forecast for Chinese growth because of “policy disappointment”.
Beijing has traditionally proved willing to inject large amounts of stimulus into its economy to prop up growth but Chinese authorities are now battling to strike a balance between stimulating the economy while maintaining financial stability.
Officials also want to stop the currency from dropping any further, even as falling interest rates in China pull the yuan down, while rising rates in the US push the dollar up.
Capital Economics warned “reviving demand would take much larger rate cuts, or regulatory measures to effectively restore confidence in the housing market”, which it sees as unlikely given the central bank’s desire to move only slowly and the troubles engulfing property developer Country Garden.
Analyst Julian Evans-Pritchard said: “The key will be the extent of fiscal support. Policymakers have taken some steps in that regard, telling local officials to fully utilise their annual quotas for special bonds by the end of next month, which implies a short-run spike in issuance. But more measures will be needed to drive a turnaround in economic activity.”
Source: finance.yahoo.com