China may borrow more as the lockdown hurts the economy

The coveted lockdowns have hit the Chinese economy and the Asian giant may have to issue more loans to continue to meet its growth targets.

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China may have to issue more debt as it seeks to keep growing in the face of a cowardly lockdown that is stifling its economy.

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

The April 29 meeting of China’s Politburo sent a “strong signal that policymakers are committed to this year’s GDP targets despite the COVID-19 barrier and the risk of geopolitical tensions,” ANZ research analysts wrote in a note the same day.

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

Chinese state media gave details of the Politburo meeting on Friday, where officials pledged more support for the economy to meet the country’s economic growth target for the year. This assistance will include infrastructure investments, tax cuts and rebates, cost overruns and other relief measures for companies.

That is why foreign investment banks are predicting that growth will slow down significantly 5.5%, including a decline in manufacturing activity in April.

According to market observers, China may raise more debt as it seeks to meet its growth targets.

“To achieve the 5.5% target, China can borrow from the future and borrow more,” said Betty Wang, senior China economist at ANZ Research, and Zhaopeng Jing, a senior Chinese strategist.

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Andrew Tilton, chief Asia-Pacific economist at Goldman Sachs, told CNBC last week that China was ready to raise infrastructure spending.

From Beijing’s point of view, such an increase in financial spending as well as easing of debt restrictions would be more desirable than financial simplification, he told CNBC’s “Squawk Box Asia”.

However, an obstacle to the government’s efforts to invest in infrastructure would be the covid-related restrictions that are being imposed indiscriminately everywhere, Tilton said.

“There are a lot of restrictions around the country, even in some cases where there is no covid case – more cautious in nature,” he said. “So one of the barriers to infrastructure promotion is that Covid restrictions will only be targeted at areas where they are most needed.”

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

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

In a turbulent real estate market, the government is also encouraging lenders to support developers, Tilton said.

Borrowing more to boost growth would be a step backwards for Beijing, which is trying to reduce debt even before the epidemic begins. The government has aggressively targeted the property sector by introducing the “three red lines” policy, aimed at reining in developers after years of growth by excessive debt. The policy sets a limit on a firm’s debt relative to its cash flow, assets and capital level.

However, this led to a debt crisis late last year as Evergrand and other developers began defaulting on their loans.

Push for business, GDP forecast

Chinese President Xi Jinping last week called for “all-out efforts” to build infrastructure, saying the country has been struggling to keep its economy afloat since the country’s most recent Kovid outbreak began nearly two months ago.

Restrictions have been imposed in its two largest cities, Beijing and Shanghai, and millions of people have been placed on fixed-home orders and institutions have been shut down.

China’s zero-covid restrictions have hit businesses hard. According to a survey by China’s EU Chamber of Commerce late last month, about 60% of European businesses in the country said they had cut their revenue estimates for 2022 as a result of Kovid control.

Among Chinese businesses, a monthly survey published last week found that sentiment between manufacturing and services businesses fell to its lowest level since the initial outbreak of the epidemic in April 2020.

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

The country’s zero-coup policy and slowing economy have already prompted investment banks and other analysts to predict that its growth will fall significantly below this year’s target of 5.5%.

Forecasts range from 3% to about 4.5%

“Given the impact of the Kovid outbreak on consumption and industrial production in the first half of 2022, we expect GDP growth to be around 4.3% by 2022, assuming the economy can begin to recover before June and then recover,” said Swiss private bank Lombard Odier. Chief Investment Officer Stephen Monier.

“If the economy continues to suffer a steady lockdown for the main urban areas, full-year growth will certainly fall below 4%,” he wrote in a Wednesday note.

– CNBC’s Evelyn Cheng contributes to this report.

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