China may demand more debt as lockdowns hit economy

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

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China may have to issue more debt as it tries to keep growing in the face of the Covid lockdowns crippling its economy.

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

ANZ Research analysts wrote in a note the same day that the April 29 China Politburo meeting sent “a strong signal that policy makers are committed to this year’s GDP target despite downside risks from COVID-19 disruptions and geopolitical tensions.”

To achieve the 5.5% target, China may borrow from the future and take on more debt.

On Friday, Chinese state media reported details of the Politburo meeting, in which officials promised more support for the economy to achieve the country’s economic growth target for this year. This support will include infrastructure investment, tax cuts and rebates, consumption-boosting measures, and other relief measures for businesses.

This is like a foreign investment Banks expect growth to drop significantly below 5.5% No.with manufacturing activity declining in April.

This means that China is likely to gain more debt as it tries to meet its growth targets, according to market watchers.

“To achieve the 5.5% target, China may borrow from the future and take on more debt,” said ANZ Research chief China economist Betty Wang and chief China strategist Zhaopeng Xing.

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Andrew Tilton, chief economist for Asia Pacific at Goldman Sachs, told CNBC last week that China is preparing to ramp up infrastructure spending.

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From Beijing’s perspective, an increase in such fiscal spending as well as debt relief would be more desirable than monetary easing, he told CNBC.Squawk Box Asia. “

However, Tilton said one of the obstacles to government efforts towards infrastructure investment is Covid-related restrictions being imposed haphazardly everywhere.

“There are a lot of restrictions across the country even in some cases in places where there are no cases of Covid – more precautionary in nature,” he said. “So one of the obstacles to the infrastructure campaign is keeping Covid restrictions only targeting areas where they are most needed.”

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

These are bonds issued by units established by local and regional governments to finance public infrastructure projects.

In the embattled real estate market, the government has also encouraged lenders to support developers, Tilton said.

Borrowing more to boost growth would be a step backwards for Beijing, which was trying to reduce debt even before the pandemic began. The government has aggressively targeted the real estate sector by implementing its “three red lines” policy, which aims to rein in developers after years of growth fueled by excessive debt. The policy sets a debt limit in relation to the company’s cash flows, assets and capital levels.

However, that led to a debt crisis late last year, with Evergrande and other developers starting to default on their debts.

Business Shocks, GDP Forecast

Chinese President Xi Jinping last week He called for a “comprehensive” effort to build infrastructureThe country has been struggling to keep its economy active since the latest Covid-19 outbreak began in the country about two months ago.

Restrictions have been imposed In the two largest cities, Beijing and Shanghai, millions of people have been forced to stay at home and businesses have closed.

China’s Covid Zero Restrictions It hurt business badly. Nearly 60% of European companies in the country said they are lowering revenue forecasts for 2022 as a result of Covid controls, according to a survey by the European Chamber of Commerce in China late last month.

Among Chinese companies, monthly surveys released last week showed that sentiment among manufacturing and service firms slumped in April to the lowest since the initial shock of the pandemic in February 2020.

The Caixin Services Purchasing Managers’ Index, a special survey that measures manufacturing activity in China, fell to 36.2 in April, according to data released last Thursday. This is well below the 50-point mark that separates growth from contraction.

The country’s no-coronavirus policy has already begun and the slowing economy Forecasts from investment banks Other analysts said its growth will fall significantly below its 5.5% target this year.

Expectations range From more than 3% to about 4.5%.

Swiss private bank Lombard Odier said: “Given the impact of the Covid outbreak on consumption and industrial production in the first half of 2022, we expect GDP growth for 2022 close to 4.3%, assuming that the economy can begin to recover before June, and then recover “. Chief Investment Officer Stephen Mounir.

“If the economy continues to suffer from the successive shutdown shocks of major urban areas, growth for the full year is certain to fall below 4%,” he wrote in a note on Wednesday.

CNBC’s Evelyn Cheng contributed to this report.

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