A woman walks along the Bund in front of the Pudong financial district in Shanghai, China.
Aly Song | Reuters
BEIJING – China’s economy faces further challenges.
Credit data for July released on Friday showed a fall in demand from businesses and households to borrow money for the future. Real estate problems persist among formerly healthy developers country garden now on the brink of insolvency. Consumer sentiment is weak.
“Weak credit data in July suggests the real estate sector’s downward spiral is continuing and rising geopolitical tensions are fueling uncertainty,” Lu Ting, chief China economist at Nomura, and a team said in a report on Friday.
“In Japan in the 1990s, companies may have repaid their debts to improve their chances of survival, but in today’s China, companies and households are cutting back on borrowing due to a lack of confidence (and trust),” the report says.
All of these factors simply cannot hide how weak credit demand and risk appetite are.
Chief Economist for China, Citi
New local-currency bank loans fell 89% in July from June to 345.9 billion yuan ($47.64 billion), less than half the 800 billion yuan analysts had forecast in a Reuters poll.
According to Reuters, the number of new yuan loans in July was the lowest since late 2009.
Those numbers “should mark a bottom” as policy action in June could boost demand somewhat, Xiangrong Yu, Citi’s chief China economist, and a team said in a note.
“Nevertheless, all factors cannot hide how weak the demand for credit and how low the appetite for risk is,” said the analysts, referring to the expectation of interest rate cuts by the end of September. Without such cuts, they anticipate a greater risk that China will miss its growth target of around 5% this year.
China is due to release economic data for July on Tuesday, which is expected to show no change in the pace of industrial production and fixed investment growth from June, according to a Reuters poll.
Retail sales are expected to rise 4.7% year-on-year in July, slightly faster than in June, the survey found.
pull real estate
China’s huge real estate sector, where the bulk of household wealth is parked, has once again become an area of concern and could weigh on the broader economy.
Developer Country Garden announced over the weekend that it was suspending trading in at least 10 of its Mainland China-traded yuan bonds.
The company missed coupon payments on two US dollar-denominated bonds last week, according to Reuters.
According to an analysis by Goldman Sachs, Country Garden’s US dollar bonds account for nearly half of the outstanding US dollar denominated high yield bonds.
The analysis showed that investment grade Chinese US dollar bonds accounted for 43% of the total volume.
“Given that the majority of [high-yield] Property developers have either defaulted or engaged in bond swaps, and we expect tensions are mounting among the rest [high yield] Developers are unlikely to have a major impact on the offshore bond market,” Goldman analysts said in a report on Friday.
“In our view, the greater concern is whether the mounting stress will spill over into the crisis [investment grade] Developers, most of which are state-owned companies [SOEs].”
The more the government tries to help the real estate industry, the longer it takes for the industry to bottom out reasonably.
Brandes Investment Partners
State-owned companies have generally found it easier to obtain credit in China, where state-owned banks are dominant. Data shows that state-owned developers have also outperformed non-state developers in recent sales.
However, China’s overall real estate sector still needs to shrink by about 10 percentage points to achieve a similar GDP contribution as Japan or South Korea, said Louis Lau, director of investments and portfolio manager for emerging markets at Brandes Investment Partners.
He pointed out that while real estate has contributed about 30% of GDP in China, it is in the bottom 20 percentage points in South Korea and Japan.
Read more about China from CNBC Pro
In 2020, Beijing began a serious crackdown on developers’ heavy reliance on debt for their growth. Authorities have eased course in recent months, with a notable change in late July, but lagged behind large-scale stimulus measures.
“The more the government tries to help the real estate industry, the longer it takes for the industry to find a reasonable bottom,” Lau said.
He is underweight China and invests selectively in a few consumer stocks and sectors that he expects to outperform.