Xi’s party is being spoiled as China’s economy continues to fade

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The only bright spot in the data was a 24 per cent increase in exports but, with central banks around the world tightening their monetary policies, global growth set to slow and its relationship with the West increasingly fractious, China can’t look to exports to power an economic upturn.

The markets’ response to the data was revealing. Oil prices fell sharply – oil is now trading around $US92 a barrel, down from more than $US98 a barrel at the end of last week – along with other commodities like copper, nickel and agricultural products. Traders clearly see China’s economy, and therefore its demand for raw materials, fading

The reasons for the spluttering within what has been, for decades, a powerhouse economy have been well-chronicled.

The crisis in the property sector is making Chinese consumers cautious and reducing consumption.Credit:Getty

The sudden imposition of rigid debt limits on property developers has imploded the property market that has been a core driver of that growth. Most of the big developers are on life-support. Hundreds of projects are stalled and incomplete. Suppliers haven’t been paid and buyers who have paid for those unbuilt apartments are revolting and refusing to service their mortgages.

With property at the heart of China’s household wealth, the crisis in the property sector is making consumers cautious and reducing consumption. Efforts to stimulate consumer activity via tax incentives and easier access to credit are failing. The credit is available, but there’s minimal demand.

The COVID-zero policy was supposedly fine-tuned to be more targeted earlier this year, but China’s cities and industries are still experiencing abrupt lockdowns that add to its citizens’ anxieties and undermine industrial activity.

The elements aren’t co-operating with Xi’s desire for a smooth path to his elevation.

Those influences on the economy could be attributed to policy blunders, or at least crude execution.
China has also been experiencing extreme weather. A drought in southern China has led to shortages of hydro electricity, causing energy rationing and factory closures to conserve power for households. Crop production is being threatened by falling water levels in the Yangtze river. There have been massive floods in northern China.

The elements aren’t co-operating with Xi’s desire for a smooth path to his elevation.

China’s authorities have been reluctant to respond to the threats to growth and financial stability posed by the property meltdown, the growing mortgage boycotts and the COVID restrictions.
Their traditional response – large-scale infrastructure investment – has been quite muted, perhaps because of the scale of the waste in previous programs and perhaps because those programs have had diminishing impacts.

This week, however, China’s Premier Li Keqiang urged local government leaders to enact measures that would boost growth and consumption and provide more fiscal support via bond issues to finance investments. He also asked them to balance their COVID responses with the need to generate more economic growth.

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There were also reports on Tuesday that Beijing has directed its state-owned China Bond Insurance Co to provide credit support – to guarantee – bond issues by some of the larger developers to enable them to access debt markets that have been closed to them by a continuing wave of defaults.

Whether that’s a solution or not is unclear. Offshore bond holders have been burned by the implosions with the fallen property giant China Evergrande and many of its peers, and a 29 per cent slump in property sales in July might suggest that there will be little demand for new apartments even if they are built.

Property prices in China have been falling for 11 consecutive months, so even those who have pre-purchased properties won’t be keen to resume servicing their mortgages even if the apartments are completed.

The PBOC move doesn’t presage a large movement down in China’s interest rates. The central bank is focused on keeping China’s relatively low inflation rate under control and, in any event, if there’s no demand for credit, reducing interest rates has minimal effect.

It would also be concerned that too big a change to China’s rate structure might, in an environment where its monetary and fiscal policies are diverging from those in the West, precipitate an exodus of foreign capital and a forced devaluation of its currency.

The last thing China – or Xi – would want, on top of the existing challenges, is the kind of foreign exchange crisis it experienced in 2015 when a currency devaluation forced it to burn about $US320 billion of its foreign currency reserves to halt an estimated $US trillion of capital outflows and end the panic-driven selling in its financial markets.

That would definitely spoil an already-souring mood in the lead-up to the national congress.

In a year where anything that could go wrong seems to be going wrong, there won’t be much for anyone other than Xi to celebrate.

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