China could raise more debt as shutdowns hit the economy

Covid shutdowns have hit China’s economy, and the Asian giant may have to issue more debt to continue to reach its growth target.

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China may have to issue more debt as it tries to continue to grow in the face of Covid shutdowns that are hampering the economy.

In recent weeks, the country has signaled that it still wants to reach its growth target of 5.5% this year.

China̵[ads1]7;s Politburo meeting on April 29 sent a “strong signal that decision-makers are committed to this year’s GDP target despite downside risks from COVID-19 disruptions and geopolitical tensions,” analysts from ANZ Research wrote in a note the same day.

To reach the 5.5% target, China can borrow from the future and incur more debt.

Chinese state media on Friday reported details of the Politburo meeting, in which officials promised more support for the economy to reach the country’s economic growth targets for the year. This support will include infrastructure investments, tax cuts and rebates, measures to increase consumption and other support measures for companies.

This is because foreign investment banks predict that growth will fall significantly 5.5% figure, with a fall in production activity in April.

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

“To reach the 5.5% target, China can borrow from the future and incur more debt,” said ANZ Research’s senior China economist Betty Wang and senior China strategist Zhaopeng Xing.

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

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

However, an obstacle to the government’s efforts for infrastructure investments will be the Covid-related restrictions that are imposed arbitrarily everywhere, Tilton said.

“There are a lot of restrictions around the country, even in some cases in places where there are no Covid cases – more lead was by nature,” he said. “So one of the obstacles to the infrastructure campaign is going to be to keep Covid restrictions targeted at exactly the areas where they are most needed.”

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

These are bonds issued by entities set up by local and regional authorities 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 boost growth would be a step backwards for Beijing, which has been trying to cut debt before the pandemic even began. The government has aggressively targeted the real estate sector by rolling out the “three red lines” policy, which aims to restrain developers after years of growth driven by excessive debt. The policy sets a limit on debt in relation to a company’s cash flows, assets and capital levels.

However, it led to a debt crisis late last year when Evergrande and other developers began defaulting on their debt.

Shock for business, GDP forecasts

Last week, Chinese President Xi Jinping called for a “complete” effort to build infrastructure, with the country struggling to keep its economy afloat since the country’s last Covid eruption began about two months ago.

Restrictions have been imposed in the two largest cities, Beijing and Shanghai, with orders to stay at home on millions of people and businesses closed.

China’s zero-Covid restrictions have hit businesses hard. Nearly 60% of European companies in the country said they cut revenue forecasts for 2022 as a result of Covid controls, according to a survey by the EU Chamber of Commerce in China late last month.

Among Chinese companies, monthly surveys published last week showed that sentiment among manufacturing and service companies fell to its lowest level in April since the first shock of the February 2020 pandemic.

The Caixin Services Purchasing Managers’ Index, a private survey measuring China’s manufacturing activity, fell to 36.2 in April, according to data released last Thursday. It is well below the 50-point mark that separates growth from contraction.

The country’s zero-Covid policy and slowing economy have already triggered predictions from investment banks and other analysts that growth will fall significantly below the 5.5% target this year.

The forecasts vary from more than 3% to around 4.5%.

“Given the impact of the Covid outbreaks on consumption and industrial production in the first half of 2022, we expect GDP growth in 2022 closer to 4.3%, provided the economy can start to pick up before June, and then pick up again,” said the Swiss private bank Lombard Odier’s. Chief Investment Officer Stephane Monier.

“If the economy continues to suffer from subsequent lock-in shocks for key urban areas, year-round growth will certainly fall below 4%,” he wrote in a Wednesday note.

– CNBC’s Evelyn Cheng contributed to this report.

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