China faces 'downward spiral' as property crisis deepens

Country Garden is the second major developer to run into trouble after failing to pay dollar bond holders. Credit: STR/AFP

China Analysts warn they are facing a «downward economic spiral» amid a growing crisis in the debt-laden real estate sector.

Seven city banks cut their growth forecasts for the world's second-largest economy in the Monday after what was described as «disappointing» and «scattered» central bank support measures.

It comes amid growing worries about a crisis in China's massive real estate sector, which is struggling under the weight of massive debt as interest rates rise. The crisis in the industry hit growth and contributed to deflation in the country. A fifth of young people are also unemployed.

Economists from Zurich note in a note: «China's economic spiral continues, which is based on the real estate market.»

“ We see an urgent need for more convincing and active state support to break the vicious circle.”

In the US, the cost of government borrowing jumped to a new 16-year high on Monday amid fears of higher interest rates and the possible consequences of an economic slowdown in China.

More pessimistic was the interest rate cut. from the Central Bank of China.

On Monday, officials slashed one of China's key lending rates but maintained another, disappointing economists who believe much broader cuts are needed to revive demand and boost consumer confidence.

Tao Wang, economist at UBS, said: «The government's political support may have been less than indicated earlier this year and less than we expected.»

0906 Producer Price Index

UBS cut its growth forecasts. for China from 5.2% to 4.8% this year and from 5% to 4.2% next year.

Citi, Morgan Stanley, Barclays, JPMorgan, Deutsche Bank and Nomura also cut your predictions.

President Xi Jinping's 5 percent target set in March is already the lowest growth target in decades.

China's economy is struggling with a disappointing recovery from a tight lockdown from the pandemic that ended only late last year.

Now it has slipped into a real estate crisis after a second major developer ran into trouble. Country Garden, the Chinese real estate giant, is facing default due to missed payments to dollar bond holders.

Ms. Wang said she now expects new real estate projects in China to fall by 25% this year, with another 10% drop expected next year. 2024.

She said: «The real estate downturn has deepened, external demand has weakened further and political support has been less than expected.»

“With roughly 60% or more of household wealth coming from real estate, the real estate market is getting weaker. it is also expected to reduce household consumption.”

The People's Bank of China on Monday cut the annual rate on core loans, to which a large share of mortgage and business loans are pegged, by 0.1 percentage points. This was less than economists expected.

At the same time, officials kept the five-year loan rate unchanged.

China Total debt as a percentage of GDP

Hong Kong's stock index Hang on this news The Seng fell 1.8%, extending the loss period to seven trading days.

Zurich-based economists said the small rate cut was «disappointing as fiscal support and consumption stimulus measures emerge.» pretty fragmentary.»

Xiangrong Yu, an economist at Citi, said the bank deliberately lowered its growth outlook for China because of «political disillusionment.»

Beijing has traditionally shown a willingness to inject large amounts of stimulus into its economy to support growth, but the Chinese authorities are now trying to strike a balance between stimulating the economy and maintaining financial stability.

Officers also want to stop the currency from further falling, even despite that falling interest rates in China are pushing the yuan down and higher US rates are pushing the dollar higher.

Capital Economics warns that “a recovery in demand will require much larger rate cuts or regulatory action to effectively restore confidence to the housing market,» which he said is unlikely given the central bank's desire to move very slowly and the problems engulfing property developer Country Garden.

Analyst Julian Evans-Pritchard said: «The degree of fiscal support will be a key factor. Politicians have taken some steps in this regard, instructing local officials to fully use up their annual special bond quotas by the end of next month, suggesting a short-term spike in issuance. But additional measures will be needed to improve economic activity.”