Worsening economic data from China

The economic news from China is all pointing one way, on the downside.

On Sunday, the National Bureau of Statistics reported that the official purchasing managers index (PMI) for the manufacturing sector fell to 49.2 in October, the second consecutive month in which this key index of purchasing activity. factories fell.

A worker wearing a face mask exercises on a new building under construction in Beijing on October 26, 2021. (AP Photo / Andy Wong)

With 50 marking the line between contraction and expansion, the October reading was lower than the 49.6 recorded for September and was the lowest since the start of the COVID-19 pandemic in February of last year. The figure was well below the median forecast of 49.9 of economists polled by the the Wall Street newspaper.

The main factors behind the drop in profit were the rapid rise in raw material costs, a general shortage of electricity and a marked slowdown in the real estate sector. Real estate giant Evergrande continues to struggle to avoid bankruptcy and leads an overnight existence as it seeks to pay interest on dollar-denominated debt.

Prior to the falls of the past two months, China’s manufacturing sector had experienced something of a boom as it recovered from the effects of the pandemic.

According to the Wall Street newspaper, while some economists expected factory output to improve with the easing of electricity restrictions imposed last month, PMI readings suggest that “the bigger picture for the Chinese economy is looking up. deteriorated”.

“Domestic demand, in particular, remains weak, held back by a struggling real estate market under pressure from Beijing’s tightening rules [the so-called three lines that have restricted credit] as well as widespread blackouts and sporadic virus outbreaks that have disrupted consumption and production activity. “

The lower PMI figures come on top of national accounts data which showed that in the third quarter, the annual growth rate fell to 4.9%, the lowest level in a year as the economy declined. grew only 0.2% over the previous three months.

The Financial Time reported that pressure is mounting on Beijing to ease credit restrictions which have been blamed for growing problems in the real estate sector.

He cited a note from analysts at Gavekal Dragonomics who argue that the source of the slowdown is not on the supply side, such as power shortages and lockdowns. On the contrary, “the real problem lies on the demand side” leading to the transition from an expected slowdown to a “shocking loss of economic dynamism”.

They highlighted the loss of demand due to the difficulties in the real estate sector. “As the real estate sector is the most important driver of cyclical activity, overall growth will weaken further [in the fourth quarter] and in 2022 ”, they wrote.

The contraction is evident in other areas. While the non-manufacturing PMI was 52.4, indicating expansion, it was down from 53.2 the month before.

Citi analysts have warned that the slowdown in manufacturing activity is accompanied by rising prices and features of stagflation – weaker economic output combined with rising prices – which have “become more evident and would limit short-term policy options “.

In the middle of last month, as Evergrande’s debt problems continued to worsen, the People’s Bank of China (PBoC) issued a statement that the financial fallout could be contained and the risks “manageable”.

This may still be the case with banks and other financial institutions. But a comment published yesterday in Bloomberg drew attention to the fact that banking and finance are not just areas of the economy hit by the crisis.

“The key to managing the crisis is not only to contain the risk of financial loans, but also the other two-thirds of the debts owed by the ailing real estate developer to a vast network of companies and businesses in its chain of supply, including suppliers. construction materials and services as well as contractors and subcontractors meeting needs ranging from labor to decoration.

China, he said, had the most complete supply chain in the world due to its vast manufacturing range, but that carried the risk that “the sudden collapse of a large non-financial corporation could have cascading effects on the real economy on a scale never seen in any other part of the world.

Evergrande has not only borrowed from banks and other financial organizations. In the common practice of many large companies around the world, it borrowed from its suppliers and subcontractors, forcing them to accept longer payment terms. When a payment comes due, small businesses are asked to accept commercial paper instead of cash – in effect a new payment extension – which they can then sell to discount brokers.

This had the potential to cause a large group of suppliers and contractors not only to lose business, but also to experience financial difficulties “possibly creating an upstream chain of bankruptcies,” the Bloomberg article said.

He noted that this situation was “new territory” for China’s central bank, the PBoC. While he had a good track record of rescuing failed financial institutions, “the restructuring of a large non-financial institution with liabilities on the same scale as Evergrande is unprecedented.”

The crisis is by no means limited to Evergrande. According to a report by research firm China Real Estate Information Corp. (CRIC) released yesterday, new home sales for the country’s top 100 developers fell 32% in October. The CRIC report said the outlook for the housing market does not look bright and sales may continue to slow for the rest of the year.

In another report on the debt crisis that many developers are facing, Bloomberg said the key question was to become “who will survive in China’s real estate industry” as the country’s credit market “suffers its biggest blow. upheaval for years ”.

In the past, offshore borrowing through Hong Kong has been a means by which cash-strapped companies have been able to raise funds. But with junk bond yields reaching as high as 20%, it has become “nearly impossible for stressed developers to refinance their maturing debt.”

According to Bloomberg calculations, Chinese developers have more than $ 2 billion in onshore and dollar-denominated payments due in November. He reported that at least four construction companies defaulted last month while Evergrande has twice avoided being declared in default only by paying interest at the last moment. But he lives hand in hand with the 30-day grace period on another $ 148 million interest payment ending this month.

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