Chinese economy slows in the face of efforts to reduce indebtedness – Economy

The pace of Chinese economic recovery in the post-pandemic period is slowing as Beijing tries to reduce corporate debt, particularly in real estate, the favorite investment vehicle for Chinese families.

Over the past ten years, the Chinese leadership has advocated an economic model based on domestic consumption, to the detriment of exports and construction, but, in the face of any sign of a slowdown, Beijing has returned to stimulating growth with more works and loans.

Finally, President Xi Jinping’s government is tackling the root of the problem by reducing leverage in the real estate sector, which supports millions of jobs.

This is causing shock waves in the country’s economy. Businesses and families are nervous about falling home sales and the construction sector, leading to a slowdown in domestic consumption.

“Many clients now want to wait and see,” said Liang Qiming, a real estate agent in Nanchang, the capital of Jiangxi province, which has thrived on building real estate.

China has become the world’s factory in recent years, but the biggest engine of economic growth was a construction frenzy that took off from the late 1990s onwards.

Real estate companies and local governments run into billions of dollars in debt to erect new apartments, office towers, shopping centers, bridges and railway lines.

Xi’s government now appears willing to accept a politically painful economic slowdown in order to reduce debt and achieve the long-term goal of self-sustaining and more stable growth.

Beijing “does not want economic growth at all costs, followed by the likely or inevitable financial market crash,” said Robert Carnell, head of Asia research at financial services firm ING.

Financial markets are concerned that one of the country’s biggest homebuilders, the Evergrande Group, could collapse in the face of a lack of liquidity and debt of at least two trillion yuan (270 billion euros).

Economists say Beijing wants to ensure that families receive the apartments they bought from Evergrande before they are finished, but that it would be sending the wrong message if it saved the company. Evergrande is “preventive cleanup,” Carnell said.

China recovered from the coronavirus pandemic before the United States, Europe or Japan, but the pace of economic growth is now slowing. Depressed by the fall in construction, the economy expanded by 4.9%, compared to the previous year, in the third quarter of the year.

This rate is much lower than the 7.9% year-on-year growth rate achieved in the previous quarter. Compared to the period between March and June – the way other major economies are measured – growth in the three months ending in September stood at 0.2%, one of the weakest in the last ten years.

Property sales fell 32% in September from the previous year. Buyers have been discouraged by restrictions on mortgage lending and anxiety over real estate companies failing to deliver prepaid apartments. This means less spending on furniture and appliances too.

Growth this quarter could drop to 3% from the same period last year, according to Japanese financial institution Nomura.

Bank of America also cut its full-year forecast from 8% to 7.7%. For next year, the US bank reduced its forecast from 5.3% to 4%.

The debt ratio of companies, households and the state rose to nearly the equivalent of three times the annual economic output last year — a figure considered excessive for a middle-income country.

Xi stated his priorities during a planning meeting in August, calling for “high-quality development” to “avoid major financial risks,” according to the official Xinhua news agency.

“China is undergoing a transformation from a growth model driven by blind investments to high quality growth,” said Chinese economist Zuo Xiaolei.

Regulators tightened controls on the use of debt by real estate companies last year. Hundreds had already gone bankrupt after other restrictions imposed since 2017.

“The risk of a sharper slowdown in real estate activity cannot be ruled out,” Oxford Economics consultant Tommy Wu pointed out in a report.

The economy is also facing obstacles due to energy rationing imposed in the country’s main manufacturing provinces to meet official efficiency targets.

Auto sales fell 16.5% in September from the same month last year, according to the Chinese Association of Automobile Manufacturers.