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China was facing a recession in 2022. Now this is Omicron


Government data released on Wednesday showed tough spots for the world’s second-largest economy in November. Housing prices fell for a third straight month, a sign of a crisis. The ongoing real estate continues to deepen. Retail sales have also struggled, given the coronavirus outbreak and the government’s “zero-Covid” approach to locking down areas where the virus outbreak is taking a toll on the economy.

These problems won’t go away, analysts say, as new outbreaks force companies to close factories in key manufacturing regions.

“A new Covid outbreak in Zhejiang has once again caused local restrictions and factory closures, while troubles in the real estate sector are likely to hold back property construction activity in the coming months. some time,” analysts from Capital Economics wrote in a note on Wednesday.

They added that the government’s efforts to loosen policies and help the economy “will only support the resulting recession”.

After emerging from 2020 as the only major economy to post record growth, China this year has faced numerous threats to continue its expansion. Energy shortages have hit industrial output for much of this year as the nation struggles to balance electricity demand with efforts to tackle the climate crisis.

China’s top leaders have expressed concern about the growth outlook. At a key policy meeting last week, they acknowledged that the economy faces “three pressures: falling demand, a supply shock and weakening expectations.”

According to Macquarie Capital, the world’s second-largest economy is still expected to grow 7.8% in 2021. But Larry Hu, Macquarie’s chief China economist, warned that “the trend is down. on a large scale will continue into the new year.”

While the official GDP target of more than 6% in 2021 is “a low result,” he added, “protecting 5% for next year is a daunting task.”

Concerns about growth

Data released by the National Bureau of Statistics on Wednesday did not offer much consolation.

Along with strong retail and real estate numbers, investment in fixed assets such as plant and equipment also waned. The index rose 5.2% in the first 11 months of the year, compared with 6.1% in the first 10 months of the year. The decline was mainly due to slower real estate and infrastructure spending.

The unemployment rate also increased slightly to 5%.

There is a bright spot. Industrial output in November rose 3.8% from a year ago, up slightly from October.

“The good news is that the manufacturing side of the economy shows some signs of stabilizing, thanks to easy power shortages and a rebound in external demand,” Hu wrote.

But the release of the data coincided with worrying news from Zhejiang province, one of the province’s biggest manufacturing and export hubs. Many factories in the province have had to suspend operations as local authorities tightened movement restriction measures to prevent the outbreak of more than 200 cases from getting worse.

‘Zero-Covid’ and new outbreaks

Questions remain about the effectiveness of China’s “zero-Covid” approach, which involves actively locking down residential areas, cities and entire regions to deal with just one or two case. Earlier closures in major economic hubs affected shipping ports and disrupted global supply chains.

The extent to which the outbreak in Zhejiang will affect manufacturing activity remains unclear. But the city of Ningbo, home to one of the world’s largest container ports, has tightened its input, stoking fears of disruption.

“Further supply chain disruption is a significant possibility,” analysts at Capital Economics wrote in a research note on Wednesday.

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Concern about the Omicron variant of the coronavirus has also grown. This week, China reported two cases of the disease, one in the northern port city of Tianjin and another in the southern province of Guangdong.

At a press conference in Beijing on Wednesday, authorities alluded to the global spread of the variant, soaring commodity prices and disrupted global supply chains, calling the “international environment.” is something that has become “more complex and serious.”

And the recent coronavirus outbreaks in China suggest that “applicable restrictions and consumer caution here will be maintained for the foreseeable future,” Capital Economics analysts wrote.

Assets slow down

And the real estate problems continued. Evergrande default about its debt last week, which led to Beijing intervention in an effort to prevent a disorderly collapse that could wreak havoc on the economy and pose greater risks to homeowners and the financial system.

Real estate structure growth slowed down as the country tried to control debt risk and limit the area using too high leverage. A regulatory crackdown that began last year, aimed at curbing excessive borrowing in the real estate sector, has reduced the sector’s liquidity and pushed some weak companies to the brink. fall.

Along with Evergrande’s recent default woes, other developers are also in trouble.

Shares of Shanghai-based Shimao Group fell sharply in Hong Kong this week after a planned asset sale sparked concerns about the company’s financial health.

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Fu Linghui, a spokesman for the National Bureau of Statistics, called the overall property market “stable”. But he acknowledged that some cities are facing “increased” downward pressure on property prices due to population loss and economic hardship.

“Debt risk is increasing for some real estate companies that previously relied on high leverage to scale blindly,” he said.

The government has indicated that it is willing to intervene and provide limited assistance. The People’s Bank of China recently announced that it will injecting 188 billion dollars of liquidity for the banking system, a move widely understood as an attempt to combat a slump in real estate.

And analysts expect Beijing to run ahead with more active policy support.

“Over the past year, we have seen a race between economic recovery and policy tightening,” wrote Hu from the Macquarie Group. “It turned out that tightening killed the recovery. Next year we will see a new race between economic contraction and policy easing.”

“While growth pressures are mounting, one does not want to underestimate Beijing’s determination to achieve stability,” he added.

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