China's economic challenges gather steam as new loans plunge, property fears loom (2024)

A woman walks at the Bund in front of the financial district of Pudong in Shanghai, China.

Aly Song | Reuters

BEIJING – China's economy is running into more challenges.

Credit data for July released Friday showed a slump in demand from businesses and households to borrow money for the future. Real estate problems persist with once-healthy developer Country Garden now on the brink of default. Consumer sentiment is weak.

"The weak July credit data suggest the downward spiral of the property sector continues, and worsening geopolitical tensions add to the uncertainty," Lu Ting, chief China economist at Nomura, and a team said in a report Friday.

"In Japan during the 1990s, corporates might have paid down their debt to improve their chances of survival, but in today's China, corporates and households are cutting their borrowing due to a lack of confidence (and trust)," the report said.

All the factors just cannot mask how weak credit demand is and how low risk appetite is.

Xiangrong Yu

chief China economist, Citi

New local currency bank loans plunged by 89% in July from June to 345.9 billion yuan ($47.64 billion), less than half the 800 billion yuan analysts had forecast in a Reuters poll.

The July new yuan loan number was the lowest since late 2009, according to Reuters.

Those figures "should mark a low" since policy moves in June could have moved up some demand, Xiangrong Yu, chief China economist at Citi, and a team said in a note.

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"Yet all the factors just cannot mask how weak credit demand is and how low risk appetite is," the analysts said, noting expectations for rate cuts by the end of September. Without such cuts, they expect a greater risk that China misses its growth target of around 5% this year.

On Tuesday, China is set to release July economic data that's expected to show no change from June in the pace of growth for industrial production and fixed asset investment, according to a Reuters poll.

Retail sales are expected to rise 4.7% year-on-year pace in July, slightly faster than in June, the poll showed.

Real estate drag

China's massive real estate sector, where the majority of household wealth is parked, has reemerged as an area of concern that it could drag down the broader economy.

Developer Country Garden announced over the weekend it was suspending trading in at least 10 of its mainland-China traded yuan bonds.

Last week, the company missed coupon payments on two U.S. dollar-denominated bonds, according to Reuters.

Country Garden's U.S. dollar bonds account for just under half of outstanding high-yield U.S. dollar-denominated bonds, according to Goldman Sachs analysis.

China U.S. dollar bonds that are of investment grade account for 43% of the total, the analysis showed.

"Given that the majority of [high-yield] developers have either defaulted or conducted bond exchanges, we believe rising stresses amongst the remaining [high yield] developers are unlikely to have broader impact on the offshore bond market," the Goldman analysts said in a report Friday.

"We believe of greater concern is whether rising stresses will spillover to [investment grade] developers, most of whom are state owned enterprises [SOEs]."

The more the government tries to help the real estate industry, the longer it takes for the industry to find a reasonable bottom.

Louis Lau

Brandes Investment Partners

State-owned companies have generally found it easier to obtain loans in China, where state-owned banks dominate. State-owned developers have also fared better in terms of recent sales than non-state-owned developers, data show.

However, China's entire real estate sector still needs to contract by about 10 percentage points to reach a similar level of GDP contribution as Japan or South Korea, said Louis Lau, director of investments and emerging markets portfolio manager at Brandes Investment Partners.

He pointed out that while real estate has contributed to about 30% of GDP in China, that share is in the lower 20 percentage points in South Korea and Japan.

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In 2020, Beijing began an earnest crackdown on developers' high reliance on debt for growth. Authorities have eased their stance in recent months, with a notable shift in late July, but stopped short of large-scale stimulus.

"The more the government tries to help the real estate industry, the longer it takes for the industry to find a reasonable bottom," Lau said.

He is underweight China, with selective investments in some consumer names and industries he expects will outperform.

China's economic challenges gather steam as new loans plunge, property fears loom (2024)

FAQs

China's economic challenges gather steam as new loans plunge, property fears loom? ›

China's economic challenges gather steam as new loans plunge, property fears loom. Credit data for July released Friday showed a slump in demand from businesses and households to borrow money for the future.

What are China's economic challenges? ›

The root cause of China's present economic problems is the highly unbalanced economic model that it has pursued over the past 30 years. Not only did China excessively rely on investment in general and on housing investment in particular to drive economic growth.

What caused the China property crisis? ›

The collapse of Evergrande, once the world's most valuable real estate company, marked the beginning of China's real estate crisis. Founded in 1996, Evergrande targeted the upper-middle class, but excessive borrowing and overbuilding led to its downfall.

What economic crisis is China facing? ›

In China's domestic market, overcapacity issues have provoked a brutal price war in some industries that is hampering profits and devouring capital. According to government statistics, 27 percent of Chinese automobile manufacturers were unprofitable in May; at one point last year, the figure reached 32 percent.

How much of China's economy is property? ›

Real estate and related sectors once accounted for about one fifth or more of China's economy, depending on the breadth of analysts' calculations. The property industry has slumped in the last few years after Beijing's crackdown on developers' high reliance on debt for growth.

What are 3 major problems in China? ›

  • Overview.
  • Regional imbalances.
  • Employment.
  • Government and law.
  • Crime.
  • Social unrest.
  • Discrimination.
  • Educational Pressure.

What are the risks of China's economy? ›

Despite these robust economic performances, China's economy faces significant challenges including declining property investment, accumulating debt risk and weak consumption growth, all of which pose downside risks to China's growth trajectory in the near term.

How bad is China's property crisis? ›

Unlike the Global Financial Crisis (GFC), the impact of China's property slowdown on households is limited. China's household debt-to-GDP ratio is 61.4% in 2022, a moderate level globally. Only half of the Chinese household debt is property-related, and mortgage loan growth has decelerated.

What is happening with property in China? ›

Since the property market began its steep downturn in 2021, a string of developers have defaulted, leaving scores of idle construction sites behind, and sapping confidence in what had for decades been the preferred savings instrument for the Chinese population.

How much debt is China in real estate? ›

The outstanding debt is estimated to be CNY 60 trillion (USD 8.9 trillion), or nearly 50% of 2022 GDP. Of that, home mortgage loans account for 65% and corporate debt for 35%. The relatively high down-payments that homeowners need to make should help contain large-scale mortgage defaults.

Is China struggling on economy? ›

Now, China's current leadership is facing an ongoing real estate crisis, you've got slowing growth and income, and a low fertility rate, among other things. On top of that… many Chinese may not be as hopeful about their futures right now.

Does China have more debt than the US? ›

Debt as a share of GDP has risen to about the same level as in the United States, while in dollar terms China's total debt ($47.5 trillion) is still markedly below that of the United States (close to $70 trillion). As for non-financial corporate debt, China's 28 percent share is the largest in the world.

Is China a threat to the global economy? ›

Beijing threatens the world's economy and public health by unsustainably exploiting natural resources and exporting its reckless disregard for the environment via BRI.

What caused the China real estate crisis? ›

China's once-thriving housing market is in turmoil, with the crisis triggered by a liquidity crunch that severely impacted developers, notably the Evergrande Group. The sector's previous growth, driven by speculative investment and excessive borrowing, has given way to a stark reality of financial instability.

Does China own a lot of US real estate? ›

China holds only about 1% of all foreign-owned land in the United States, while Canada owns nearly a third. Canada holds 31% of all foreign owned land, with the Netherlands and Italy following with 12 and 7% respectively. China owns a small fraction, just about 1%, while other countries own 28%.

Why are house prices falling in China? ›

Funding for developers has stayed weak even after the government drew up a “white list” late last year of property firms that are eligible for loans. A broad gauge of financing for builders, including loans, bonds and proceeds from home sales, shrank 23% from a year earlier, separate data showed Monday.

What are major issues in China currently? ›

China's Disregard for Human Rights
  • Repression in Xinjiang.
  • Fear of Arbitrary Arrest.
  • Religious Freedom Abuses.
  • Stifling Freedom of Expression.
  • Forced Labor.
  • Assault on Hong Kong's Autonomy.
  • Severe Restrictions in Tibet.

What are the current economic conditions in China? ›

China's economy is experiencing an uneven recovery after an extended weak period but continues to face fundamental challenges. Consumer demand is lagging, and the property market is hurting. Emerging market stocks made a solid recovery in the second quarter, despite these challenges.

What are the factors affecting China's economy? ›

Domestic trade, privatization and investment are driving China's economic growth. Foreign trade has surprisingly little effect on economic growth (per capita GDP). Railways negatively affect less-developed provinces. China's government has to get better at distributing the benefits of GDP growth to its citizens.

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