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China may add more debt as lockdown measures affect economy

The Covid shutdowns have hit the Chinese economy and the Asian giant may have to issue more debt to continue hitting its growth target.

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China may have to issue more debt as it tries to resume growth in the face of Covid-19 shutdowns that are weakening its economy.

The country has signaled in recent weeks that it still wants to hit its 5.5% growth target this year.

ANZ Research analysts wrote in a statement the same day.

To achieve the 5.5% target, China is likely to take on debt in the future and take on more debt.

Chinese state media on Friday detailed that Politburo meeting in which officials promised more support for the economy to achieve the country’s economic growth target in the coming months. five. That support would include infrastructure investment, tax cuts and breaks, measures to boost consumption and other relief measures for companies.

It’s foreign investment Banks expect growth to drop significantly below 5.5% numberswith manufacturing activity slumping in April.

That means China is likely to take on more debt as it tries to hit its growth targets, according to market observers.

“To hit the 5.5% target, China could borrow into the future and take on more debt,” said ANZ Research senior China economist Betty Wang and senior China strategist, Zhaopeng Xing, said.

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Andrew Tilton, chief economist for Asia-Pacific at Goldman Sachs, told CNBC last week that China will increase infrastructure spending.

From Beijing’s perspective, increasing fiscal spending as well as easing debt restrictions would be more desirable than monetary easing, he told CNBC.Squawk Box Asia. “

One stumbling block to the government’s infrastructure investment efforts, however, is that Covid-related restrictions are being indiscriminately imposed everywhere, Tilton said.

“There’s a lot of restrictions across the country, even in some cases in places where there aren’t any Covid cases – more precautions are needed,” he said. “So one of the obstacles to the infrastructure campaign is keeping Covid restrictions only targeting the areas where they are needed most.”

One option for the government is to issue so-called special local government bonds, Tilton said.

These are bonds issued by entities set up by local and regional governments to finance public infrastructure projects.

In the appreciative property market, the government has also encouraged lenders to support developers, Tilton said.

Taking on more debt to fuel growth would be a setback for Beijing, which was trying to cut debt before the pandemic began. The government has aggressively targeted the real estate sector by implementing a “three red lines” policy aimed at attracting developers after years of growth fueled by excessive debt. Debt limit policy is concerned with the cash flow, assets and capital level of a company.

However, that led to a debt crisis late last year when Evergrande and other developers began defaulting on their loans.

Business shocks, GDP forecast

President of China Xi Jinping last week calls for “all-out” efforts to build infrastructurewith the country struggling to keep its economy steady since the country’s most recent Covid outbreak began about two months ago.

Restrictions have been applied in its two largest cities, Beijing and Shanghai, with stay-at-home orders of millions and closures of facilities.

China’s zero-Covid restrictions has had a heavy impact on businesses. Nearly 60% of European businesses in the country say they are cutting their 2022 revenue forecast due to Covid control measures, according to a survey late last month by the EU Chamber of Commerce in China.

Among Chinese businesses, monthly surveys released last week showed sentiment among manufacturing and services businesses in April fell to its lowest level since the first shock of the pandemic. Translated in February 2020.

The Caixin Services Purchasing Managers’ Index, a private survey that measures China’s manufacturing activity, fell to 36.2 in April, according to data released last Thursday. This is much lower than the 50-point mark that separates growth and contraction.

The zero-Covid policy and the country’s slowing economy have caused predictions from investment banks and other analysts expect its growth to fall significantly below its 5.5% target this year.

Various forecasts from more than 3% to about 4.5%.

“Given the impact of the coronavirus outbreak on consumption and industrial output in the first half of 2022, we expect 2022 GDP growth to be close to 4.3%,” said Swiss private bank Lombard Odier. , assuming the economy can start to recover before June and then recover,” said Swiss private bank Lombard Odier, chief investment officer Stephane Monier.

“If the economy continues to suffer successive shutdown shocks to key metropolitan areas, full-year growth is certain to fall below 4%,” he wrote in a note Wednesday.

– Evelyn Cheng of CNBC contributed to this report.

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