The construction of a residential and recreational area in Liaocheng, China.
Zhang Peng | LightRocket | Getty Images
With economic slowdown in China slowing down, some analysts may say Beijing is returning to some of its old strategies – such as building better infrastructure and easing real estate controls – and this could add to existing concerns over high levels of debt.
The world's second-largest economy recorded growth of 6.2% for the second quarter on Monday. Although official data from China are frequently questioned, data has been the slowest increase in at least 27 years from the same quarter a year ago.
In addition to slowing global growth and trade tensions with the US, China faces numerous domestic challenges. Beijing has sought to reduce its dependence on debt for growth, stimulate consumption and improve the financing opportunities of private companies.
However, analysts expect the slowdown in growth to continue until the end of the year. And they expect the support, some of which are already in place, to be in the form of higher infrastructure spending and higher borrowing.
"Monetary policy will play a very limited role over the next six months," said Dan Wang, an analyst at the Economist Intelligence Unit, noting that the central bank is likely to make policy changes only for specific sectors. "Fiscal policy will continue to play a leading role, and the growth drivers continue to be investment because consumption is very weak this year."
Retail sales increased 9.8% in June from Monday's data a year ago. However, growth was mainly driven by a 1
Shadow Banking in the Game
One of Beijing's most popular incentive measures last year was encouraging banks to lend to privately owned companies. These companies contribute to most of the country's growth and employment, but China's big state banks prefer to work with the government's less risky companies.
Wang from the EIU said that many Chinese companies, especially ones, are working. They are less well known and still can not be funded despite the data showing that banks are increasing their lending to the private sector as a whole.
Instead, a survey of more than 3,300 companies in China from the privately held China Beige Book found that this is the case in the second case. In the quarter, companies reported the highest proportion of loans from the so-called shadow banking sector in the history of the survey.
Shadow lending refers to unregulated financings, which are typically provided by non-banks and are less monitored and have a higher proportion of risk.
The share of non-bank lenders in companies rose to 45% after the recent low of 21% in the third quarter of 2018.
Proportion of non-bank lenders grows to nearly half
Source: China Beige Book
"Each sector reported leaps (in shadow funding) . " according to a report on the activity in the second quarter of China Beige Book. "An important source of funding this quarter was an old hybrid lender: state non-banks, which are formalized government-backed intermediaries that transfer loans from traditional banks to those who are otherwise too risky to formally borrow." 19659002] The report found that the banks became more selective about who they were lending to after lending to privately owned companies in the first quarter. In general, companies are lending more to existing spending, the report said.
Strengthening Trust in Infrastructure
At the beginning of the year, analysts predicted that China was facing so many economic problems that the government's best decision fell infrastructure spending.
This expectation remains unchanged despite the stabilization of the Chinese economy in the first half of the year.
A report by ICBC International this week, Chief Economist and Research Director Cheng Shi, and Senior Economist Qian Zhijun said that measures on the fiscal front that affect fixed income and other special government bonds are likely to be added to future policy.
"The role of infrastructure in supporting the economy is expected to be strengthened," it says in a CNBC translation of the Chinese-language report] but it also means that more bonds are issued and dependence on debt increases.
According to Wind Information, outstanding local government bonds have increased more than sixfold in four years – of 1.2 trillion yuan ($ 174.5 billion). May 2015 to 19.6 trillion yuan in May 2019.
In the first half of the year, China's top economic planning body, the National Development and Reform Commission, approved 112 corporate bonds worth 364.72 billion yuan, an increase of 131% a year ago, spokeswoman Meng Wei said at a press conference on Tuesday. According to Meng, the uses of the bonds include the construction of transport infrastructures, wastewater treatment and the development of industrial parks.
In June, the Chinese authorities also issued a new document urging local governments and financial institutions to use special loans, as well as other financing measures to support major regional development projects.
However, it is difficult to say whether an expected increase in infrastructure bond issuance will be as large this year as it was a few years ago, Boris Kan said. A vice president and senior credit officer for project and infrastructure finance at Moody & # 39; s.
Chinese PM Li Keqiang announced in March that this year's economic growth target is between 6% and 6.5%, slower than the pace of 6.6% in 2018.
] Back to Property
Some criticized Beijing for having acted too fast and too drastically against its debts, which has contributed to a slowing economy and a bear market – defined as a drop of more than 20% over one Year high – in the Shanghai Composite last year.
"We expect incentives to escalate around the fourth quarter 19 when policymakers reiterate economic growth as a top priority," Larry Hu, chief economist for China at Macquarie, said Monday.
"At that time, they would lower interest rates to support the real estate sector, relax regulation to boost infrastructure spending, and introduce measures to stimulate consumer durables such as car and home appliances," Hu said. 19659002] Despite China's rise in house prices and China's recent efforts to prevent developers from collecting funds abroad, it could be unavoidable for the authorities to increase support for the real estate market by making local governments more cautious in issuing bonds. The manufacturing sector is also under pressure from trade tensions with the US.
As a result, it expects real estate market controls to be "significantly eased" in the second half of the year, especially in areas outside of major cities such as Beijing and Shanghai.