Aug 18 / Victor Arduin

Macroeconomics Weekly Report - 2023 08 18

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"Recently, concerns about a crisis in China's real estate sector have increased, following news that Country Garden, one of the country's leading real estate companies, has failed to pay its dollar-denominated debt."

Risks Continue to Surround Chinese Growth

  • Risks emerge from China as companies like Country Garden raise concerns of more defaults in the future.
  • Due to the size of the real estate sector in China, the prolonged slowdown is affecting other segments. Industrial production fell to 3.7% from 4.4% in the annual comparison in July.
  • Amidst the need for stimuli, the country has cut interest rates, trying to introduce credit policies to boost consumption.
  • Another focus of concern is the stock market, which has faced devaluations, increasing the risks of a capital flight cycle in the country.

Introduction

The Chinese real estate sector is causing a lot of concern among analysts, raising the debate about the country's financial health and its chances of achieving its growth target this year.

Just last week, a series of data on the Chinese economy was released and several sectors continue to bring pessimism. The industrial production and trade sales registered a decrease in the annual comparison, frustrating market expectations.

Unemployment rose to 5.3% last July in China. In addition to the data showing a worsening in the labor market, the country suspended the disclosure of unemployment among young people, numbers that raised concern and had reached a record level of 21.3% in June.

Image 1: Unemployment Rate in China (%)

Source: Refinitiv

Image 2: China Fixed Asset Investment (%)

Source: Refinitiv

Real estate crisis in China?

Recently, concerns about a crisis in China's real estate sector have increased, following news that Country Garden, one of the country's leading real estate companies, has failed to pay its dollar-denominated debt. The Chinese economy has seen slower-than-expected growth and difficulty in stimulating the country's consumer confidence, which is largely anchored in the real estate sector.

The segment is extremely important for the economy, responsible for almost a third of the country's gross domestic product (GDP) and for a fifth of all investment in fixed assets. Analysts are already starting to project that the country will have difficulty reaching the official 5% growth target. Therefore, the country's authorities need to carry out more stimulus focused on the sector to help its slowing economy.

Image 3: Sales of Residential Building YoY (%)

Source: Bloomberg

Meanwhile, last week's data showed that industry and trade data came in below expectations, raising risk premiums significantly in the external environment. The country is a major exporter and importer to the world, and the reduction of its economic activity brings risks to the trade of other nations.

The added value of production by industrial companies reached 3.7% in July in the annual comparison, below the 4.4% expected by the market and a retreat in the annual comparison of June, when it registered an increase of 4.4%. The prolonged weak performance in the real estate construction sector is leading to lower activity in the country's industrial sector, where weakened demand ends up reflecting in lower inventories and production for the sector. Commerce sales also suffered a retreat, growing 2.5% in the month of July in the annual comparison, below the expectation of 4.5%.

Image 4: Growth in Industrial Production and Retail Sales YoY (%)

Source: National Bureau of Statistics of China

Surprise Interest Rate Cut

China's monetary authorities cut the interest rate on one-year medium-term loans from 2.65% to 2.50% last week and the Loan Prime Rate (LPR) by 10 basis points from 3.55% to 3.45% on the last 21st. The government seems to be very concerned about the health of its financial system, and is intensifying efforts to expand its monetary policy to boost the country's economy, which has been slowing down.

Meanwhile, the fall in the country's stock indexes is raising fears that the worst may yet come, with the possibility of a capital flight cycle due to deflationary data, a slowdown in the real estate market and a crisis in the parallel lending sector.

Image 5: Chinese Stock Market Index

Source: Refinitiv

In Summary

Analysts are already beginning to question China's conditions for reaching the official 5% growth target for the year 2023. The central problem for the country today is how to rescue consumer confidence and create conditions for its real estate market to recover. Due to the importance of the segment for the country's economy, its poor performance ends up affecting other sectors such as industry, which slowed down in July.

While the rate cuts are an important signal to the market, China needs more stimulus to boost its slowing economy. Some events are raising more concerns about the risks facing the country. The defaults announced by major real estate companies are an example, and the Country Garden case, despite being recent, may not have been the last.

The continuity of the Chinese slowdown contributed to a more challenging macro scenario for commodities and emerging currencies, given that the country is the main importer of several products and one of the main trading partners of several emerging countries.

Weekly Report — Macro

Written by Victor Arduin
[email protected]
Reviewed by Alef Dias
[email protected]
www.hedgepointglobal.com

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