China’s economy is facing more challenges as the latest data showed a sharp decline in credit growth, a worsening property crisis and low consumer sentiment. The world’s second-largest economy is struggling to maintain its momentum amid the impact of the Covid-19 pandemic, geopolitical tensions and structural problems.
Credit crunch
One of the most alarming signs of China’s economic slowdown is the plunge in new bank loans in July, which fell by 89% from June to 345.9 billion yuan ($47.64 billion), the lowest level since late 2009, according to official data released on Friday. This was far below the market expectation of 800 billion yuan and reflected a slump in demand from both businesses and households to borrow money for the future.
Analysts said the weak credit data suggested that the downward spiral of the property sector, which accounts for about a quarter of China’s GDP, continued to drag down the economy. The tightening of regulations on the real estate industry has led to a sharp drop in sales, investment and construction activity, as well as rising risks of default among developers.
The credit crunch also indicated that China’s private sector, which contributes more than 60% of GDP and 80% of employment, was losing confidence and cutting back on investment and hiring. Private firms have been facing difficulties in accessing financing, especially from banks, amid rising costs and uncertainties.
Some analysts expected China’s central bank to cut interest rates or the reserve requirement ratio (RRR), which is the amount of cash that banks must hold as reserves, to ease the liquidity squeeze and stimulate lending. However, others argued that such moves would have limited effects given the weak demand for credit and the high debt levels in the economy.
Property pain
Another major challenge for China’s economy is the deepening crisis in the property sector, which has been hit by a series of regulatory measures aimed at curbing speculation, leverage and risk. The government has imposed strict limits on borrowing by developers and buyers, tightened land supply and enforced a “three red lines” policy that caps key debt ratios for real estate firms.
These policies have taken a toll on the property market, which saw sales, investment and construction activity fall sharply in July. According to a Reuters calculation based on official data, property investment contracted 8.1% in the first seven months of 2023 from a year earlier, while sales by floor area dropped 20.4%.
The property slump has also triggered fears of a debt crisis among developers, some of which are struggling to repay their maturing bonds and loans. Over the weekend, Country Garden, one of China’s largest developers, announced that it was suspending trading in at least 10 of its mainland-China traded yuan bonds due to “abnormal price fluctuations”. The move sparked panic among investors and raised questions about the company’s financial health.
The property sector is not only a key driver of China’s economic growth, but also a major source of wealth and social stability for millions of households. A prolonged downturn in the housing market could have serious spillover effects on other sectors, such as construction, steel, cement and furniture, as well as on consumer spending and confidence.
Consumer woes
China’s consumer sector has also been under pressure as the Covid-19 pandemic continues to pose challenges for domestic demand. China has adopted a zero-tolerance approach to containing the virus, which has resulted in frequent lockdowns, travel restrictions and mass testing whenever new outbreaks occur.
These measures have dampened consumer sentiment and spending, especially on discretionary items such as travel, entertainment and dining out. Retail sales growth slowed to 8.5% year-on-year in June from 12.4% in May, and is expected to moderate further to 4.7% in July, according to a Reuters poll.
China’s consumer price index (CPI), a main gauge of inflation, also fell into negative territory in July, dropping 0.3% year-on-year for the first time since November 2020. The decline was mainly driven by lower food prices, especially pork, which plunged 43.5% due to increased supply and reduced demand.
While lower inflation could boost consumers’ purchasing power in theory, analysts said it also reflected weak demand and excess capacity in the economy. Moreover, China’s producer price index (PPI), which measures the cost of goods at the factory gate, rose 9% year-on-year in July, indicating strong upward pressure on input costs for manufacturers. The widening gap between PPI and CPI could squeeze corporate profits and erode consumers’ real income.
Outlook
China’s economic outlook remains uncertain as it faces multiple headwinds at home and abroad. The Covid-19 pandemic is still posing challenges for both public health and economic activity, while geopolitical tensions with the US and other countries could affect trade and investment flows.
China’s structural problems, such as high debt levels, excess capacity, environmental degradation and demographic aging, are also limiting its growth potential and requiring deeper reforms. However, some analysts said that China’s political system, which is dominated by the Communist Party and its leader Xi Jinping, could hinder the implementation of market-oriented and institutional changes.
China’s official GDP growth target for 2023 is around 6%, which is widely seen as achievable given the low base of comparison in 2020. However, some economists have warned that China could face a hard landing or a prolonged period of stagnation if it fails to address its economic imbalances and vulnerabilities.
