Beijing’s difficult balance between growth and stability

The PBoC move comes as many economists have started cutting their forecasts for consumption growth in the world’s second-largest economy to reflect the supply bottlenecks Chinese manufacturers now face and consumer reluctance. Chinese to open their wallet.

A growing number of economists now expect China’s growth this year to be just under 9%,

Economists fear that the sharp slowdown in credit growth portends slowing economic growth.

Nervousness in the face of a possible slowdown

Last week, China reported that total social finance – a general measure of credit and liquidity in the economy – rose 11% at the end of June, compared to the previous year. This is well below the record growth rate of 13.7 percent that was recorded in the 12 months leading up to last October.

Fears of a possible slowdown in China – the world’s largest consumer of commodities – are already being felt in commodity markets.

Hedge funds have started to reverse their bets that the prices of a wide range of commodities – from copper to oil to corn – will rise as the global economic recovery gathers pace.

Confidence in this bet has waned as investors worried that Chinese growth could slow at a time when the highly contagious variant of the delta coronavirus is spreading rapidly.

In addition, economists are far from convinced that the drop in the reserve requirement ratio will be sufficient to offset the drag on economic activity caused by Beijing’s regulatory tightening.

Chinese regulators’ efforts to instill greater discipline in the country’s huge bond market are also weighing on growth,

The first sector to take the brunt of the stricter rules was the Chinese real estate sector, which had rebounded strongly after the pandemic, in large part due to low interest rates and the easing of urban residential controls.

But last August, Chinese regulators were alarmed at the massive debts that real estate developers were accumulating. They were concerned that this huge build-up of debt could jeopardize financial stability.

So they instituted a new “three red lines” policy that capped debt levels and required real estate companies to hold enough cash to cover short-term liabilities – which would apply to real estate groups.

But since then, Beijing has taken on the country’s powerful tech industry. Last November, Chinese policymakers unveiled new rules aimed at curbing anti-competitive behavior by local internet giants.

However, the crackdown went beyond competition concerns.

In January, Beijing ended Ant Group’s successful initial public offering after Chinese tech billionaire Jack Ma publicly criticized Chinese financial regulators.

And Ma’s Alibaba suffered further sanction in April, when Chinese regulators fined the tech giant a record $ 2.8 billion after ruling it had abused its market position for years. .

Meanwhile, Chinese regulators are also investigating delivery giant Meituan for alleged monopoly behavior.

But this regulatory blitz comes at a cost. As the Commonwealth Bank economics team points out in its latest China Economic Update, “the antitrust crackdown on big tech platforms has slowed down some of the rapidly expanding parts of the Chinese economy.”

Other economists argue that the crackdown on big tech companies is likely to undermine Chinese consumer confidence. This is because the rapidly growing internet industry was one of the best sources of high paying jobs for young Chinese workers.

Meanwhile, efforts by Chinese regulators to instill greater discipline in the country’s massive bond market are also weighing on growth.

China has tried to reduce moral hazard and curb risk-taking in the world’s second-largest credit market.

By allowing a growing number of businesses and entities linked to local governments to default on their obligations, they hoped to teach investors the importance of conducting proper due diligence.

Indeed, investors are still worried that Beijing will eventually come to the rescue of investors who have bought around $ 22 billion in global bonds issued by China Huarong Asset Management – which is majority owned by China’s finance ministry.

But as Commonwealth Bank economists point out, these “capital market reforms have raised concerns about increasing debt defaults.”

And these concerns have made it more difficult, and more costly, for some borrowers to access bond market financing.

“The bitter market sentiment and the stricter policy have translated into a decrease in corporate bond issuance,” they note.

“A market-induced reassessment of credit risk has weakened the ability of some market participants to raise funds. “

Commonwealth Bank economists point out that higher borrowing costs put increased pressure on businesses and homeowners.

“Borrowing costs have gone up. The rate of financing invoices facing businesses has increased, ”they point out.

The crisis is particularly hard on small businesses, which are suffering the double whammy of higher borrowing costs and higher input costs.

As Commonwealth Bank economists point out: “Small businesses face significantly higher raw material costs.

“But weak demand and fierce competition have limited the ability of small businesses to pass their increased costs on to consumers.”

But it’s not just commercial borrowers who are suffering from rising borrowing costs.

Chinese real estate borrowers are also hit by higher interest rates, in large part because of attempts by regulators to cool down the real estate industry.

According to media reports, mortgage rates have climbed in major cities because commercial banks restrict lending to the real estate sector.

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About Marco C. Nichols

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