China could take on more debt as lockdowns hit economy

Covid lockdowns have hit the Chinese economy, and the Asian giant may need to issue more debt to continue meeting its growth target.

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

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

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

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

Chinese state media reported 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 support would include infrastructure investments, tax reductions and refunds, measures to stimulate consumption and other measures to help businesses.

It is that foreign investment banks are predicting that growth will fall significantly below the 5.5%, with a drop in manufacturing activity in April.

That means China is likely to rack up more debt as it tries to hit its growth targets, market watchers say.

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

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

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

However, a stumbling block to the government’s infrastructure investment efforts would be the Covid-related restrictions being imposed indiscriminately everywhere, Tilton said.

“There are a lot of restrictions all over the country, even in some cases in places where there are no Covid cases – more precautionary in nature,” he said. “So one of the hurdles of the infrastructure campaign is going to be keeping the Covid restrictions targeted only at the areas where they’re most needed.”

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

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

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

Borrowing more to spur growth would be a step backwards for Beijing, which tried to reduce its debt even before the pandemic began. The government has aggressively targeted the real estate sector by rolling out the “three red lines” policy, which aims to rein in developers after years of growth fueled by excessive debt. The policy imposes a limit on debt relative to a company’s cash flow, assets and capital levels.

However, this led to a debt crisis late last year as Evergrande and other developers began to default on their debt.

Business shocks, GDP forecasts

Chinese President Xi Jinping last week called for an “all-out” effort to build infrastructure as the country struggles to keep its economy going since the country’s latest Covid outbreak began about two months ago.

Restrictions have been imposed in its two largest cities, Beijing and Shanghai, with stay-at-home orders imposed on millions and establishments closed.

China’s zero Covid restrictions have hit businesses hard. Nearly 60% of European businesses in the country said they were reducing their revenue projections for 2022 as a result of Covid checks, according to a survey carried out late last month by the EU Chamber of Commerce in China. .

Among Chinese companies, monthly surveys released last week showed that manufacturing and services business sentiment fell in April to the lowest since the initial shock of the pandemic in February 2020.

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

The country’s zero Covid policy and slowing economy have already prompted predictions from investment banks and other analysts that its growth will fall significantly below its 5.5% target this year.

Forecasts range from over 3% to around 4.5%.

“Given the impact of the Covid outbreaks on consumption and industrial production in the first half of 2022, we expect 2022 GDP growth closer to 4.3%, assuming the economy can begin to recover before June and then rebound,” said Swiss private bank Lombard Odier. Director of Investments Stéphane Monier.

“If the economy continues to suffer from successive lockdown shocks for key urban areas, full-year growth would certainly fall below 4%,” he wrote in a Wednesday note.

– CNBC’s Evelyn Cheng contributed to this report.

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