Weekly Brief: What Happens In China Doesn’t Stay In China

Weekly Brief: What Happens In China Doesn’t Stay In China

over 2 years ago3 mins

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China’s government has been at odds with a host of its sectors lately, but this latest crackdown on the real estate market might prove that what happens in China doesn’t stay in China.

🕰 Recap

  • China’s serious about tackling the chronic issues in its property sector, which makes up around 30% of the country’s economy
  • But a drastic slowdown in the sector is bound to lead to a drastic slowdown in the country’s economic growth rate
  • All at a time when manufacturing activity in China suffered its first official contraction since the beginning of the pandemic
  • That led several investment banks to cut their growth forecasts for the Chinese economy

✍️ Connecting The Dots

China has long been the biggest engine of global growth: according to a study by the International Monetary Fund (IMF), China accounted for 28% of worldwide growth from 2013 to 2018 – more than twice that of the US. And according to calculations from Bloomberg, the country’s expected to contribute more than one-fifth of the total increase in the world’s economic output over the next five years. But with short and long-term headwinds to contend with, there’s no guarantee that it’ll live up to those lofty expectations.

Headwinds like the supply chain issues that China’s manufacturing sector – one of the main drivers of the country’s economic recovery this past year – is struggling with, along with fuel shortages and forced production cuts due to government emissions targets. All those factors conspired to push September’s manufacturing activity into its first official contraction since the start of the pandemic, which might partly be why investment banks Goldman Sachs and Nomura recently slashed their 2021 growth forecasts for the Chinese economy from 8.2% to 7.8% and 7.7% respectively.

Separately, the Chinese government is taking a very tough stance to reduce debt levels in the property sector and rein in a chronic oversupply of residential real estate. That’s likely to lead to a significant drop in property investment and construction and, in turn, a dramatic slowdown in China’s property sector, which makes up around 30% of the country’s economy. That has the potential to depress economic growth for years to come, bringing to an end the Chinese “growth miracle” experienced over the past three decades.

🥡 Takeaways

1. Won’t someone please think of the local government spending?

One big – and often overlooked – consequence of China’s declining real estate market is that it’ll lead to lower land sales by the country’s local governments. Those land sales – which were worth around $1.3 trillion last year – generate about one-third of local government revenues and are a vital funding source for big infrastructure projects. And since spending on those projects and other physical assets accounted for 43% of China’s economy last year, the dwindling ability of local governments to spend on infrastructure has the potential to knock Chinese growth off balance.

2. You might want to swap China for India.

Results of a poll out this week showed that 12% of professional investors are planning to slash their investments in Chinese assets – three times as many as when the survey was last conducted in 2019. And if BNP Paribas is to be believed, those investors should be reallocating their investments to India. The investment bank reckons companies will increasingly diversify their supply chains away from China in favor of India, which will help boost the third-biggest Asian economy’s manufacturing sector and, in turn, its economic growth. That bodes well for the country’s asset prices.

🎯 Also On Our Radar

Netflix made its first ever acquisition of a video game developer, Night School Studio, this week. It’s all part of the streaming giant’s efforts to expand into gaming, with plans to make video games a part of its subscription with no ads or in-app purchases. The hope is that the new features will give the firm another way to win customers over and keep the ones it already has, but time will tell if that’ll actually amount to anything…

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