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China’s property crackdown sinks economic growth to 90s levels –



China’s economy is slowing to the lows seen way back in 1990 — a price President Xi Jinping seems willing to pay to reduce its dependence on the property sector.

Beijing’s squeeze on the real estate sector will linger into next year and beyond, a development many hadn’t seen coming that has now prompted banks like Goldman Sachs Group Inc., Nomura Holdings Inc. and Barclays Plc to cut their growth forecasts in 2022 to below 5%.

Bar last year’s pandemic year, that would be the weakest in more than three decades.

It’s a big stepdown from pre-pandemic rates closer to 7%. Given China’s status as the world’s second-biggest economy, it means softer demand for commodities pumped out by countries like Australia and Indonesia and slower spending by Chinese consumers who are crucial to multinationals from Apple Inc. to Volkswagen AG.

Economists are coming to realize that the Communist Party’s Politburo, the top decision-making body, was serious when it vowed this year not to use the property sector to stimulate the economy as they did following past downturns.

Officials say excess supply of housing is a threat to economic stability, and want investment to go to prioritized sectors like hi-tech manufacturing rather than more apartments.

“President Xi thinks the property sector is too big,” said Chen Long, an economist at Beijing-based consultancy Plenum. “Xi is personally involved in real estate policies, so ministries don’t dare to ease policies without his approval.”

Rob Subbaraman, Nomura’s chief economist, estimates China’s slowdown to 4.3% next year from 7.1% this year “can directly reduce world GDP growth by around 0.5 percentage points.” Beijing is willing to “sacrifice some short-term growth for greater long-term stability,” he said.

Covid Outbreaks

Weak consumer spending is another drag on the economy, with China’s zero tolerance to sporadic coronavirus outbreaks and stringent lockdown measures spooking consumers and forcing business to shut.

“In the case of longer-lasting zero Covid policy in China or a much deeper property downturn, GDP growth in 2022 could drop to 4%,” Tao Wang, chief China economist at UBS AG, said in a note.

China’s property sector is the biggest question mark over the economy because of its huge scale — more than 900 million square meters of apartments are constructed each year, official data show.

That investment, plus the output of related sectors like steel and cement production, accounts for anything between 20% and 25% of China’s GDP, economists estimate. Any slowdown — or an outright decline — in real estate development would leave a gap in the economy that expansion in no other sector could easily fill.

“China’s property slowdown is a major headwind to the global economy because it is likely to be the biggest headwind to the Chinese economy next year,” said Larry Hu, chief China economist at Macquarie Group Ltd.

China’s strict ‘zero COVID’ policy has dragged down consumer spending [FILE: Roman Pilipeyepa/EPA]

Real estate construction powered China’s V-shaped economic recovery from the pandemic, but the sector moved into contraction this summer after Beijing orchestrated a slowdown in mortgage lending that brought property developers such as China Evergrande Group close to bankruptcy.

The most spectacular decline has been in newly started housing projects, the steel-intensive part of real estate development, which fell more than 33% year-on-year in October, the biggest decline on record.

Property developers get most of their financing by selling homes to households before they are built. A pullback in mortgage lending, and a growing pessimism about the property market among households are causing sales to fall.

While the People’s Bank of China announced a slight uptick in mortgage lending in October, “the government is not rushing to stimulus even though starts have been collapsing,” said Rosealea Yao of Gavekal Dragonomics.

Beijing’s recent announcement of trials of a property tax to discourage the purchase of housing as an investment will damage sales sentiment further, she added.

As a result, multiple economists predict a 10% decline in new housing starts next year. But because Beijing is concerned about risks to social stability if developers are unable to complete pre-sold projects, officials will try to ensure existing projects are finished.

That means overall investment in real estate could grow next year even if sales and housing starts decline.

China’s housing sales and construction are expected to slow in 2022 [Qilai Shen/Bloomberg]

Morgan Stanley sees 2% growth in property investment next year, which would be down sharply from a pre-pandemic rate of 8%. Others, like UBS, are more pessimistic, predicting a 5% decline.

The slowdown could last for years: Goldman Sachs expects the housing sector to reduce GDP growth by 1 percentage-point annually each year through to 2025.

While Beijing has a lot of control over the housing market, it’s still possible the slowdown has self-reinforcing dynamics that could be hard for authorities to control, leading to an even sharper downturn than the more pessimistic forecasts.

For example, Chinese households tend to avoid property purchases when prices are falling, which can lead to lower sales and more price declines.

If Beijing is serious about resolving imbalances in the property market, it would require a “multi-year slowdown in construction activity, which will certainly slow the economy given the property sector’s weight,” said Logan Wright of Rhodium Group. “A lot still depends on what Beijing does in the next couple of months.”

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China's Economy Shows Signs of Improvement as Covid Eases – BNN



(Bloomberg) — China’s economy showed further signs of improvement in June with a strong pickup in services spending as Covid outbreaks and restrictions were gradually eased.

The official manufacturing purchasing managers index rose to 50.2 from 49.6 in May, the National Bureau of Statistics said Thursday, slightly below the median estimate of 50.5 in a Bloomberg survey of economists. It was the first time since February that the index was above 50, indicating expansion in output compared with May.

The non-manufacturing gauge, which measures activity in the construction and services sectors, climbed to 54.7, the highest in more than a year and well above the consensus forecast of 50.5. 

China’s CSI 300 Index rose as much as 0.9% while major stock gauges in Asia broadly fell.

Government restrictions to contain Covid outbreaks have gradually eased over the last month. The financial hub Shanghai lifted its two-month lockdown at the start of June by allowing more shops to reopen, more factories to resume production, and for port operation to pick up. 

The data suggests “the pace of recovery accelerated as the Covid situation stabilized,” said Peiqian Liu, chief China economist at NatWest Group Plc. There was a “broad based but still soft recovery in both production and new orders,” and the figures show the rebound is still milder compared with the recovery from the Wuhan lockdown in 2020, she said.

Some 19 of the 21 sectors in the service sectors tracked in the survey returned to expansion last month, up from just six in the previous month, according to the NBS. Gauges of sectors previously hit badly by the outbreaks all improved, such as railway transport, air transport, accommodation, catering and entertainment.

The recovery remains fragile though as the country sticks to its Covid Zero strategy, meaning restrictions could be tightened if outbreaks of the highly transmissible omicron variant flare up again. Chinese President Xi Jinping reaffirmed his Covid Zero policy this week, saying it was the most “economic and effective” for the country.

Economists, meanwhile, are holding firm on their gross domestic product growth forecasts for this year. The median projection in a Bloomberg survey for 2022 growth is 4.1%, well below Beijing’s annual target of around 5.5%. Bloomberg’s aggregate index of eight early indicators showed some improvement in June, though the recovery remains muted.

(Updates with additional details)

©2022 Bloomberg L.P.

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China's economy didn't bounce back in the second quarter, China Beige Book survey finds – CNBC



China’s exports surged by 16.9% in May from a year ago, two times faster than analysts expected. Pictured here on June 15, 2022, are workers in Jiangsu province making stuffed toy bears for export.
Si Wei | Visual China Group | Getty Images

BEIJING — Chinese businesses ranging from services to manufacturing reported a slowdown in the second quarter from the first, reflecting the prolonged impact of Covid controls.

That’s according to the U.S.-based China Beige Book, which claims to have conducted more than 4,300 interviews in China in late April and the month ended June 15.

“While most high-profile lockdowns were relaxed in May, June data do not show the powerhouse bounce-back most expected,” according to a report released Tuesday. The analysis found few signs that government stimulus was having much of an effect yet.

Shanghai, China’s largest city by gross domestic product, was locked down in April and May. Beijing and other parts of the country also imposed some level of Covid controls to contain mainland China’s worst outbreak of the virus since the pandemic’s initial shock in early 2020.

In late May, Chinese Premier Li Keqiang held an unprecedentedly massive videoconference in which he called on officials to “work hard” — for growth in the second quarter and a drop in unemployment.

Transportation, construction companies aren’t telling you they’re getting new products. They’re telling you they’ve slowed investment, their new projects have actually slowed.
Shehzad H. Qazi
Managing Director, China Beige Book

Between the first and second quarters, hiring declined across all manufacturing sectors except for food and beverage processing, according to the China Beige Book report.

The employment situation likely won’t start to improve until China stimulates its economy more in the fall, China Beige Book Managing Director Shehzad H. Qazi said Wednesday on CNBC’s “Squawk Box Asia.”

So far, there’s been little sign that stimulus has kicked in, especially in infrastructure, said Qazi who is based in New York.

“Transportation, construction companies aren’t telling you they’re getting new products,” he said. “They’re telling you they’ve slowed investment, their new projects have actually slowed.”

Inventories surge, orders drop

Unsold goods piled up, except in autos. Orders for domestic consumption and overseas export mostly fell in the second quarter from the first. Orders for textiles and chemicals processing were among the hardest-hit.

The only standout domestically was IT and consumer electronics, which saw orders rise during that time. Orders for export grew in three of seven manufacturing categories: electronics, automotive and food and beverage processing.

“Weak domestic orders and expanding inventories indicate the presumed second-half improvement will be unpleasantly modest,” the report said.

The authors noted the services sector saw the greatest reversal. After accelerating in growth in the first quarter, services businesses saw revenue, sales volumes, capex and profits drop in the second quarter.

Across China, only the property sector and the manufacturing hub of Guangdong saw any year-on-year improvement, the China Beige Book said.

Official second-quarter gross domestic product figures are due out July 15. GDP grew by 4.8% in the first quarter from a year ago.

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U.S. Economy Shrank Worse-Than-Expected 1.6% Last Quarter As Recession Fears Grow – Forbes




The economy last quarter posted its worst annualized showing since the pandemic-induced recession in 2020, the government said in an updated release Wednesday, blaming an unexpected decline in economic activity on the omicron variant of Covid-19 and decreased government assistance.

Key Facts

The U.S. economy shrank at an annual rate of 1.6% in the first quarter of 2022—the first decline since the second quarter of 2020, the Bureau of Economic Analysis reported Wednesday in a worse-than-expected update to last month’s figure, which showed a decline of 1.5%.

The update primarily reflected softer-than-expected spending on business inventories and residential investments, which was only partially offset by an uptick in consumer spending, the government said.

In the first quarter, a record wave of Covid-19 cases spurred by the omicron variant resulted in continued restrictions and business disruptions, while government assistance programs including forgivable loans to businesses and social benefits to households expired or tapered off—further preventing growth, according to the release.

Broad declines in exports, government spending and business inventories, along with increased imports, spurred the overall decline, the government said.

The overall drop stands in stark contrast to the economy’s better-than-expected growth of 6.9% in the fourth quarter, the fastest rate in nearly 40 years, thanks in part to a jump in exports and increased inventory investments by car dealers.

What To Watch For

Economists are widely calling for a return to growth this quarter, thereby avoiding the two consecutive quarters of negative GDP growth that constitute a technical recession, but a growing wave of experts have warned odds of a recession next year are growing. In a research note on Monday, analysts at S&P Global Ratings said aggressive Federal Reserve policy to combat ongoing price spikes will usher in low economic growth this year and potentially risk a recession, warning: “What’s around the bend next year is the bigger worry.” S&P put the odds of a recession in 2023 at 40%—more than the 35% odds Morgan Stanley issued last week.

Key Background

Though the economy quickly bounced back after the Covid recession in 2020, the Fed’s withdrawal of pandemic stimulus measures, Russia’s invasion of Ukraine and lingering Covid restrictions have heightened market uncertainty this year. Last quarter, the stock market posted its worst showing since the market crash in early 2020, with the S&P falling 5% and the tech-heavy Nasdaq 9%. “Recession risks are high—uncomfortably high—and rising,” Mark Zandi, chief economist at Moody’s Analytics, said in a recent note. “For the economy to navigate through without suffering a downturn, we need some very deft policymaking from the Fed and a bit of luck.”

Crucial Quote

In an email after April’s initial report, which estimated a 1.4% decline despite expectations for 1% growth, Bankrate analyst Mark Hamrick said the lackluster performance serves as a reminder of the “volatile and complicated times in which we live,” but that the contraction is “less worrisome” because key drivers of economic growth, such as consumer and business spending, have been holding up despite the widening trade deficit and big swings in business inventories.

Further Reading

Cathie Wood Claims Economy Already In A Recession—Warns Inflation And Inventories Pose ‘Big Problem’ (Forbes)

Unemployment Will Rise And ‘Extreme’ Price Pressures Continue As Fed Hikes Risk Recession, S&P Warns (Forbes)

Major Bank Is First To Forecast A Recession—More Could Follow (Forbes)

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