China’s economic crisis fuels calls for stronger political action

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(Bloomberg) – China’s economic activity weakened in October, putting pressure on Beijing to step up support after taking major steps last week to reduce the consumer impact of Covid Zero policies and a housing bust.

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Retail sales contracted 0.5% in October from a year earlier – the first decline since May and worse than economists’ expectations for 0.7% growth. Industrial production growth weakened, real estate investment continued to contract and the unemployment rate remained high.

October saw a rise in Covid cases, with authorities tightening controls ahead of the Communist Party congress and discouraging travel during the weeklong National Day holiday. As Covid infections continue to spread in November – including in the main manufacturing hub of Guangdong – where partial lockdowns have been imposed – growth prospects for the rest of the year remain bleak.

Beijing recently took its strongest steps yet to stabilize the housing market and reduce the economic burden of the Covid Zero policy, fueling investor optimism about a recovery in growth. However, no rebound will be felt for several quarters, and with economists expecting the Covid disruptions to continue into next year, officials are under pressure to do more.

“Given the soft patch in October, policymakers may put in place more easing measures to stabilize the economy towards the end of the year,” wrote analysts at Macquarie Group Ltd. directed by Larry Hu in a note. “Chinese policymakers are likely to miss this year’s growth target, but they may want to bring growth back to its potential” of more than 5% next year, they wrote.

Ding Shuang, chief economist for Greater China and North Asia at Standard Chartered Plc, said a significant easing of Covid restrictions is unlikely to happen until the second quarter of next year and “therefore a significant rebound in consumption may not come until the second half of 2023.”

In addition to Covid-related restrictions and the real estate crisis, other pillars of growth are also struggling: bank credit is at its lowest in five years and exports fell in October for the first time since May 2020.

Infrastructure investment was a bright spot last month, rising 8.7% in the first 10 months of the year from a year earlier as the government steps up stimulus measures. However, real estate investment continued to weaken, contracting by 8.8% over the same period.

What Bloomberg Economics says…

Covid Zero and a declining property market “have made the recovery increasingly vulnerable, especially now that exports are contracting. The series of policy changes in recent days are unlikely to reverse the trend immediately, but the risks now point more to the upside for next year’s growth.

Eric Zhu, Chinese economist

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A breakdown of retail sales showed that sales of home appliances and audio-visual equipment fell the most in October, while sales of building and decorating materials continued to fall sharply due to a worsening of the real estate crisis. Restaurant revenue fell 8.1% last month, the most since May.

China’s CSI 300 stock index gained 1.5% at 1:44 p.m. local time, bringing the rise this month to nearly 10%. The yield on 10-year government bonds fell 2 basis points after jumping in the previous two sessions. The yuan traded up 0.32% in the onshore market at 7.0482 to the dollar.

“It’s clear that new policies aimed at boosting domestic demand are needed to refuel China’s fragile recovery,” Bruce Pang, chief economist and head of research for Greater China at Jones Lang LaSalle Inc., told reporters. still low expectations for household income and macroeconomic growth.

The authorities are increasing support measures to help businesses. On Monday, the central bank announced a loan repayment holiday for small businesses that have been hit by Covid restrictions. The banking regulator has also allowed property developers to access more of the money that buyers pay upfront for homes.

The People’s Bank of China also on Tuesday ensured sufficient levels of liquidity in the banking system to support the economy. Some economists also expect the PBOC to lower the reserve requirement ratio, or the amount of cash banks must hold in reserve, in the coming months.

Growth prospects will largely depend on China’s willingness to take further steps to refine its Covid policies. Economists polled by Bloomberg predict GDP growth will slow to 3.3% this year and rebound to 4.8% next year.

“The outlook is not as pessimistic as China is poised to gradually ease Covid policies to boost domestic demand in the coming months,” said Liu Peiqian, chief China economist at NatWest Group Plc. .

–With help from Fran Wang.

(Updates with additional details and comments)

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