China could really explode into an alarming crisis for three reasons

China could really explode into an alarming crisis for three reasons

China is a “time bomb” According to the President of the United States: The Second World Power It can really explodeWhat is behind Biden’s expression fueled by tensions between Washington and Beijing that are getting stronger and stronger?

Although it is not easy to give a single answer, what is certain is that The Dragon is going through a difficult economic time and complicated. The great Asian nation is struggling and the post-pandemic momentum is struggling to manifest itself as expected, sounding a series of alarms globally.

risks China’s financial and economic explosion They exist and manifest themselves in at least three ways: CleansingAnd real estate collapse With new giants on the brink of default, Debts large local enterprises.

When these factors are brought together, the result can be disastrous: is the Dragon in crisis, will it be able to recover or will something explode, leaving an impact on the global economy? 3 points to observe carefully to understand Where is China’s economy really headed?.

1. Eliminate inflation: China is bucking this trend

Since China imposed its first strict lockdown on Wuhan in early 2020, Its economy has not caught up with the rest of the world. When the country then abandoned its strict anti-Covid controls late last year, many economists hoped that “indecision” would persist and that the Dragon would rebound quickly, even as other major economies entered a recession.

That was not the case. Beijing’s growth remains disappointing. In addition, the inflation door was opened, which in China is deflation. Analysts feared that China’s renewed appetite for raw materials and other commodities would put upward pressure on global inflation, making life more difficult for central bankers elsewhere.

However, with weak domestic demand, the Dragon has not really played this role. According to data released on August 9, Consumer prices decreased by 0.3%. in July compared to the previous year. Viewed in isolation, this is nothing to worry about too much.

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However, consumer prices are not the only ones that will decline. the Prices charged by producers It has now fallen year-on-year for ten consecutive months. Those recovering from Chinese exports fell more than 10% in July, UBS analysts estimated. The GDP deflator, a broad measure that covers all goods and services produced in a country, fell 1.4% in the second quarter from a year earlier.

Many economists expected pork and food prices to fall as well. Moreover, a weak housing market does not help drive inflation. In fact, he takes it to a lower level.

From a financial point of view, China’s downturn is emerging The latest risks to the turbulent stock marketInvestors’ optimism about a long-awaited earnings recovery has waned.

Some companies have already had to cut prices to survive in the weak macro environment. Analysts warn companies about this Falling into a vicious circle If consumers choose to hold off on buying in anticipation of further price cuts, this leads companies to sacrifice profits to attract buyers.

Not only that, it is The collapse of new loans Fears of deflation and a worsening economic slowdown heightened in July, as analysts say further policy easing is needed.

2. Real Estate Warning: Country Garden Towards Default?

Less than two years after the failure of China’s Evergrande Group sent shockwaves around the world, A larger Chinese developer is on the brink of bankruptcy.

Bonds and stocks of Country Garden Holding Company fell this week after Bondholders fail to receive payments of coupons by an early deadline, sparking fears that it could be the next giant to fail. The company is considering rolling over some soon-to-be-dissolved yuan-denominated bonds.

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The company revealed Thursday that it expects a net loss of 45 billion yuan to reach 55 billion yuan ($7.6 billion) for the first half of 2023, compared to a gain of 1.91 billion yuan a year earlier.

the Country Garden’s financial difficulties They confirm investors’ worst fears about the country’s massive housing market, which has resumed contraction after a brief rebound in the first quarter.

Home sales fell the most in a year in July, making it difficult for real estate companies to get the funds they need to ease the credit crunch. Country Garden’s failure to pay its debts will strain fragile investor sentiment as Beijing tries to revive the turbulent real estate market.

It was a country garden The largest developer in China for contract sales from 2017 — when it took first place from Evergrande — through 2022. The company has fallen to sixth place this year due to Sales decline. The company has focused on building housing projects in lower-tier cities, which have been hit more by the slowdown than first-tier cities like Beijing and Shanghai.

“Because of the latest Deteriorating sales and refinancing environmentThe available funds on the company’s book have been constantly reduced, which has gradually put pressure on liquidity.said the giant’s official note.

3. The debt of Chinese provinces is a serious problem

Beijing has been making one of the biggest efforts in recent years to deal with i Debt accumulated by local governments In a sign of growing concern by the authorities about the risks of financial instability as the country’s economy falters.

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China’s State Council, the country’s cabinet, is sending teams of officials to more than 10 of the financially weakest provinces to examine their books — including the entities’ opaque off-balance sheet liabilities — and find ways to reduce their debt.

Heavy borrowing from Chinese provinces has become a pressing issue for policymakers as they seek to end the country’s long reliance on debt-fueled infrastructure consolidation to drive economic growth.

Goldman Sachs’ estimate puts total local government debt at 94 trillion renminbi ($13 trillion), including liabilities for off-balance sheet entities known as local government financing vehicles.

A feasible debt solution would reshape the regional investment and financing landscape, but it would also trigger a launch Re-pricing of bonds which are collected locally and can affect the shares of regional banks.

The spending model of local governments has become increasingly unsustainable after the coronavirus pandemic sharply increased their costs, while a downturn in land sales that many depend on for revenue has worsened the broader financial health of local governments in China’s regions.

The knot will be very difficult to untie and can lead to a deep crisis. This was explained by a person close to the Finance Ministry, as quoted by the Financial Times: Debt conversion programs will not solve the root problem because heavily indebted local governments may find it difficult to repay their debts in the future. Much slower economic growth in the future will undermine tax revenues, which are a major source of debt repayment.”.

China must grow again at a rapid pace in order to solve its problems and avoid exploding into a real “multi-crisis”.

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