China’s economy hit by real estate

The latest data from the National Bureau of Statistics of the People’s Republic of China shows the continued trend towards a slowdown in the country’s economic growth in July: the growth of industrial production in annual terms slowed down from 4.4% to 3.7%, retail sales – from 3.1% to 2.5%. After the publication of the data, the Central Bank of the country announced a slight reduction in the rate on the medium-term lending program. Market participants, however, are more concerned about the state of the country’s real estate market and possible negative consequences for the financial sector, as well as municipal budgets, in the event of a worsening situation with the sector’s debt burden.

The latest data from the National Bureau of Statistics of the People’s Republic of China confirmed the continuation of the trend towards a slowdown in economic growth in July – the growth in industrial production in annual terms slowed down to 3.7% from 4.4% in June (month-on-month, the indicator increased by 0.01%, in general for seven months the increase was 3.8%. In production, the increase was 1.3% yoy, in processing – 3.9%, in the production of energy, gas and water – 4.1%. Rapid growth continues to show only the production of solar panels and vehicles on “alternative” energy sources – here the annual increase was 65.1% and 24.9%, respectively. At the same time, the official PMI in the industry since April has remained below the 50-point mark separating the growth of activity from its decline, in July the figure was 49.3 points.

In services, the situation looks better – the corresponding index grew by 5.7% yoy (from the beginning of the year – by 8.3%). PMI in services also remained in positive territory, amounting to 51.5 points. At the same time, retail sales grew more slowly – by 2.5% against 3.1% (month-on-month decrease by 0.06%), since the beginning of the year the increase was 7.3%, but the National Bureau separately notes that online trade in goods is growing faster than usual by 10%, it accounts for more than a quarter of turnover in China.

Capital investments in July, judging by the generalized data, were noticeably reduced: for seven months, the increase was 3.4% yoy, including investments in infrastructure increased by 6.8% yoy, in production – by 5.7% , in real estate – decreased by 8.5%. For six months, investments in fixed assets grew by 7.2% (while investments in real estate fell by 7.9%).

Against the backdrop of these data, the People’s Bank of China yesterday announced a reduction in the rate on the medium-term lending program (MLF) from 2.65% to 2.5% – this is the second decrease in the quarter (the regulator thus counts on supporting liquidity in the banking system). The decrease was probably contributed not only by the data for July (the deterioration was predicted by most analysts, especially after the publication of extremely weak data on Chinese foreign trade; see Kommersant on August 9), but also by the growing anxiety of investors due to the state of the real estate market, after after the largest private developer, Country Garden, first announced the need to defer payments on offshore bonds, which was seen as a sign of a lack of liquidity in the sector. The deterioration of the situation could also have a negative impact on financial companies that invest in real estate and shadow banks.

Local budgets also depend on construction: against the backdrop of a recession in the sector, their income from the sale of land is declining, which worsens the situation with servicing municipal debts – according to the IMF, the volume of such debt instruments issued through special structures will reach $ 9 trillion this year (50% China’s GDP), while the total debt of municipalities is estimated at $12.8 trillion (76% of GDP). At the same time, the debt of the central government is only 21% of GDP (it is assumed that the troubled debts of municipalities can be covered precisely through transfers or the issuance of new government bonds).

Continued economic stimulus is also quite likely, this is indicated as deflation in July (prices fell by 0.3%, for manufacturers they decreased by 4.4% yoy, but this decline was 1 percentage point less than in June; month to month, prices fell by 0.2%), and unemployment rose by 0.1 percentage points, to 5.3%. The simultaneous worsening of indicators clearly indicates a weakening of economic growth, which facilitates the work of regulators. The US Federal Reserve, we note, is facing a more difficult task of fighting inflation while maintaining high demand, this is indicated, among other things, by data on retail sales published yesterday – their growth by 0.7% compared to June exceeded expectations (0.4%), in in annual terms, the increase was 3.2% (against 1.5% in June).

Tatyana Edovina