MNI:China Needs To Step Harder On Macro Levers To Boost Demand

Lack of demand is becoming the main constraint of the Chinese economy after an initial quick rebound as it emerged from Covid lockdowns, and recovering momentum requires macro policy to play an even bigger role in boosting investment and consumption, according to analysts.

The recent data on manufacturing activities indicated a slower pace of economic recovery, as both the official manufacturing PMI and Caixin PMI focusing on smaller manufacturers fell by over one percentage point in July to 49.0 and 50.4, respectively.

In addition to an expected off-season production lull and a slight resurgence of Covid-19 cases, insufficient demand is the main difficulty facing manufacturing enterprises. Over 50% of manufacturers surveyed reported weak demand and the figure has risen for four consecutive months, said Zhao Qinghe, analyst of National Bureau of Statistics in a statement.

Meanwhile, external demand is also weakening with the new export order sub-index in the official PMI down 2.1 percentage points to 47.4%. External demand weakened on signs of recession in developed economies linked to sharp interest rate hikes. Domestic demand is dragged down by the still bleak real estate market and sluggish consumption, said Wen Bin, chief economist of Minsheng Bank in a research note.

REAL ESTATE DOWNTURN

An over 20% y/y decline in both the transaction prices and areas of home sales in H1 is the deepest for the same period since 1999, and the real estate industry had unprecedently dragged down the overall economy by 4.6 percentage points, wrote Guan Tao, chief economist at BOC Securities in a blog post.

The downward adjustment in the real estate sector has broadly dampened a stream of industries including building materials, decoration, home appliances, furniture, and finance, while also pressuring employment and local fiscal strength, said Guan.

Tangled in continuous developers’ debt defaults and recent mortgage boycotts, the sector may find it hard to regain momentum soon, and thus, hopes are pinned on boosting infrastructure investment to drive up demand. SEE: MNI: China Eyes Plans On Unfinished Housing Units Amid Boycotts

Top policymakers emphasised in the end-July politburo meeting that fiscal and monetary tools should effectively make up for insufficient demand, urging local governments to make good use of project-backed special bonds as the issuance of a total CNY3.65 trillion of such bonds for the whole year is nearly complete as of July.

It is widely expected that Beijing may front-load some next year’s special bond quota to fill any fiscal gap in H2, or as suggested by the politburo meeting, local governments may further tap into the remaining debt quota from previous years, according to analysts.

By end-June, the national special debt balance was CNY20.26 trillion, while the 2022 special debt limit was CNY21.82 trillion, leaving room for an extra CNY1.55 trillion special bonds, said Xiong Yuan, chief economist at Guosheng Securities.

BOOST CONSUMPTION

But only relying on expanding investment may have limited effect and create new excess capacity eventually, if consumption fails to lift, said Guan.

He believes the key to promote consumption is to stabilise employment and expectations. It is necessary to increase support to the service industry hit hard by the pandemic and regulations, while strengthening liquidity support and improving solvency, said Guan.

A report by China Finance 40 Forum suggests China should pay close attention to a risk in H2 that the driving forces of consumption, real estate and exports could fall into a downturn at the same time. Regular monetary policy, including cuts to the reserve requirement ratio and interest rates should be used in a timely manner to boost aggregate demand, the report said.

In the longer run, weakening demand, especially from consumers, will become a restriction on the Chinese economy, as the country enters an era of negative population growth and an aging society, said Cai Fang, member of the People’s Bank of China’s Monetary Policy Committee in a forum last weekend. China’s population may peak this year or next year, Cai added.