The challenging path of China's economic recovery

China's manufacturing activities unexpectedly declined last month due to weak demand and Covid-19 containment measures. The National Bureau of Statistics of China (NBS) reported on July 31 that the country's Purchasing Managers' Index (PMI) was only 49 in July, lower than 50.2 in June. A PMI below 50 indicates a contraction in production.

In addition, property sales - which had rebounded in May and June - declined in July due to a wave of payment defaults on bank loans for slow-progressing projects.

The sales of the top 100 real estate companies in the country dropped by 39.7% in July compared to the same period last year, and decreased by 28.6% from June to $77.6 billion USD, according to data from China Real Estate Information.

The manufacturing and real estate sectors contribute to one-third of China's economy. Therefore, these figures indicate that the road to recovery from the pandemic is still long. Although local governments have been more effective in controlling Covid-19, Beijing reiterated its unwavering stance on future epidemic prevention measures.

"Surveys show that China's economic recovery slowed down in July due to diminishing momentum from gradual reopening," noted Julian Evans-Pritchard, a senior China economist at Capital Economics. He predicted that the country's economic activities would remain weak in the coming quarters.

An assembly line for car seats at the Yanfeng Adient factory in Shanghai, China. Photo: Reuters

China's manufacturing hubs, including Shanghai, saw strong recovery in June after widespread lockdowns. However, the pace of growth has shown signs of slowing amidst a resurgence of the virus, weakened domestic and global demand, and a sluggish real estate market.

China's GDP in the second quarter increased by 0.4% - the weakest in over two years, reflecting the impact of the lockdowns. This result led officials to acknowledge that the target growth rate of around 5.5% for this year is unattainable unless there is a significant stimulus package.

"The foundation of economic recovery still needs to be strengthened," noted Zhao Qinghe, a senior statistician at NBS. He highlighted insufficient market demand and the vulnerability of energy-intensive sectors as particularly concerning factors.

Only 10 out of 21 manufacturing sectors surveyed by NBS showed growth in July. The sub-index on export orders continued to decline for the 15th consecutive month.

This index is likely to further decline after the U.S. Federal Reserve raised interest rates by an additional 0.75 percentage points last month to combat inflation. Tightening monetary policies by the U.S. and other major economies pose a risk of dampening foreign demand for goods produced in China.

The services sector, however, remains expansive overall. The non-manufacturing PMI reached 53.8 in July, though it decreased from 54.7 in June. Strict restrictions such as the requirement for PCR test results to use public transportation or enter restaurants in many cities, as well as quarantine for individuals traveling between cities, continue to suppress consumer demand.

In July, China experienced isolated Covid-19 outbreaks. However, most of the lockdowns were limited to less developed regions of the country, such as the provinces of Gansu and Guangxi.

Meanwhile, the real estate market began weakening at the end of last year. Recently, the situation has worsened due to a wave of payment defaults on housing loans for slow-progressing projects.

The exodus started in late June at an Evergrande project in Changshu Town, Jiangxi Province. Subsequently, customers from 320 projects nationwide also joined in, according to GitHub data as of July 29.

Weekly data compiled by CRIC for 30 cities identified as severely affected by the payment default wave showed a 12% decrease in new home sales for the week ending July 10 compared to the previous week. Prices then dropped a further 41% in the week ending July 17.

The Chinese government believes that local authorities must take responsibility for resolving real estate issues within their jurisdictions. Localities have devised a range of measures. Dozens of cities have granted loan extensions and reduced interest rates. Some subsidies are entirely in cash. Relief funds for struggling real estate developers have also been established. Some localities even have plans to reclaim land from troubled projects.

However, Song Hongwei, Director of Research at the Tongce Research Institute, specializing in monitoring and analyzing China's real estate market, stated that "this sector will remain unstable if the liquidity crunch of developers does not ease."

Source: VnExpress (According to WSJ)