China could accumulate more debt as blockades hit the economy

The Covid blockade has hit the Chinese economy and the Asian giant may have to issue more debt to continue achieving its growth target.

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China may have to issue more debt as it seeks to continue growing in the face of Covid blockades that are slowing its economy.

The country has signaled in recent weeks that it still wants to reach its 5.5% growth target this year.

The China Politburo meeting on April 29 sent a “strong signal that policymakers are committed to meeting this year’s GDP target despite the downside risks due to COVID-19 disruptions and geopolitical tensions,” they said. ANZ Research analysts wrote in a note the same day.

To reach the 5.5% target, China could borrow from the future and borrow more.

Chinese state media on Friday reported details of that Politburo meeting, where officials pledged more support for the economy to meet the country’s economic growth target for the year. Such support would include investments in infrastructure, tax cuts and discounts, measures to increase consumption and other relief measures for companies.

This is like foreign investment banks expect growth to fall significantly below 5.5% numberwith a decline in manufacturing activity in April.

This means that China is likely to accumulate more debt as it tries to meet its growth targets, according to market watchers.

“To reach the 5.5% target, China could borrow from the future and borrow more,” said Betty Wang, senior Chinese economist at ANZ Research, and Zhaopeng Xing, senior Chinese strategist.

Andrew Tilton, Goldman Sachs chief Asia-Pacific economist, told CNBC last week that China is set to increase infrastructure spending.

From Beijing’s point of view, increasing that fiscal spending and easing debt restrictions would be more desirable than monetary easing, he told CNBC. “Squawk Box Asia. “

However, one obstacle to the government’s efforts to invest in infrastructure would be Covid-related restrictions being imposed indiscriminately everywhere, Tilton said.

“There are many restrictions across the country even in some cases in places where there are no cases of Covid, of a more precautionary nature,” he said. “So one of the obstacles to the infrastructure campaign will be keeping Covid restrictions targeting only the areas where they are most needed.”

One option for the government is to issue so-called local government special bonds, Tilton said.

These are bonds issued by units set up by local and regional governments to finance public infrastructure projects.

In the besieged real estate market, the government has also encouraged lenders to support developers, Tilton said.

Borrowing more to stimulate growth would be a setback for Beijing, which tried to cut debt even before the pandemic began. The government has aggressively targeted the real estate sector by launching the “three red lines” policy, which aims to hold back developers after years of growth fueled by excessive debt. The policy places a limit on debt in relation to a firm’s cash flows, assets and capital levels.

However, this led to a debt crisis late last year when Evergrande and other developers started not paying their debt.

Chinese president Xi Jinping last week it called for an “all-out” effort to build infrastructurewith the country struggling to keep its economy booming since the country’s latest Covid outbreak began about two months ago.

Restrictions have been imposed in its two largest cities, Beijing and Shanghai, with orders to stay home slapped to millions of people and factories closed.

Zero Covid restrictions in China they hit businesses hard. Nearly 60% of European businesses in the country said they were cutting revenue projections for 2022 due to Covid controls, according to a survey conducted late last month by the EU Chamber of Commerce in China.

Among Chinese firms, monthly surveys released over the past week showed sentiment among manufacturing and service firms fell in April to the lowest level since the initial shock of the pandemic in February 2020.

The Caixin services Purchasing Managers’ Index, a private survey that measures Chinese manufacturing activity, showed a drop to 36.2 in April, according to data released on Thursday. This is far below the 50-point mark that separates growth from contraction.

The country’s zero-Covid policy and the economic slowdown have already begun forecasts by investment banks and other analysts that its growth will drop significantly below its 5.5% target this year.

Forecasts go from over 3% to about 4.5%.

“Given the impact of the Covid epidemic on consumption and industrial production in the first half of 2022, we expect GDP growth in 2022 to be closer to 4.3%, assuming the economy can start to recover before June,” and then recover, “said the Swiss private bank Lombard Odier. Stephane Monier, Chief Investment Officer.

“If the economy continues to suffer from successive lockdown shocks for key urban areas, growth for the full year would certainly fall below 4%,” he wrote in a statement on Wednesday.

– Evelyn Cheng of CNBC contributed to this report.