China's Growth Target at Risk as Downside Risks Spread
Potential Miss on Growth Target
Economists warn that China is increasingly likely to miss its growth target of around 5% this year without additional stimulus. The country's recent suspension of data on youth unemployment, along with a broad slowdown and a property market slump, pose challenges to achieving the target.
Weakness in Property Construction and Depressed Consumption Demand
Prolonged weakness in property construction contributes to destocking pressures in the industrial space and depresses consumption demand. This, in turn, may keep economic momentum subdued for the rest of the year and lead to deflation pressures. Stronger or unconventional policies may be necessary to revive the economy.
Role of Beijing in Supporting the Economy
Lender of Last Resort and Spender of Last Resort
To address the challenges, Nomura's Chief China Economist and team suggest that Beijing should act as a lender of last resort to support troubled developers and financial institutions, as well as a spender of last resort to boost aggregate demand. This dual role can help stabilize the economy and mitigate the risks.
Policy Support and Market Confidence
Beijing has acknowledged the economic challenges and signaled more policy support, including an unexpected cut in key rates by the People's Bank of China. However, these moves require time to take effect and have not yet restored market confidence, particularly amid concerns about property developers and default risks in the trust industry.
Financial Risks and Priorities
Challenges in the Financial System
China's recent troubles, including the potential default of giant developer Country Garden and missed payments by Zhongrong International Trust, highlight financial risks. However, experts note that these cases are not systemically threatening to China's trust industry and banking system.
Shift in Priorities and Reorganizing Financial Regulatory Bodies
Chinese authorities' crackdown on real estate developers in 2020 aimed to curb reliance on growth. This year, defusing financial risks has become a priority, and the country is reorganizing its financial regulatory bodies. High local government debt and reduced cash levels have limited fiscal policy support for the economy.
Transitioning to Sustainable Growth Drivers
Long-Term Sustainability and Shift in Growth Drivers
China has been working to improve the long-term sustainability of its economy, moving away from reliance on investment in sectors like infrastructure and real estate towards consumption. Policymakers face the challenge of calibrating stimulus to avoid an economic hard-landing while transitioning property and investments to a downtrend.
Emerging Strategic Sectors and New Growth Drivers
China's emerging strategic sectors, including green economy sectors, digital economy, advanced manufacturing, and semiconductor manufacturing, will play a crucial role in the country's transition to new growth drivers. High-tech manufacturing has shown strong year-on-year growth, outpacing industrial production.
In conclusion, China faces the risk of missing its growth target as downside risks spread. Addressing challenges in property construction, consumption demand, and financial risks will require Beijing to play a dual role in supporting troubled developers and financial institutions while boosting aggregate demand. The country's transition to sustainable growth drivers and the recalibration of stimulus policies present both challenges and opportunities for policymakers in managing economic stability and long-term sustainability.
Hot Take: Implications for New Businesses Amid China's Economic Challenges
The potential miss on China's growth target and the spread of downside risks present a challenging landscape for new businesses. The country's economic slowdown, property market slump, and financial risks could impact the business environment and investment climate.
Impact on Business Financing and Market Opportunities
High interest rates and deflation pressures could increase the cost of borrowing for businesses, affecting their growth and expansion plans. However, this could also present opportunities for businesses offering innovative, cost-effective solutions, as consumers and businesses alike seek ways to manage their expenses in a challenging economic environment.
Emerging Sectors as New Growth Drivers
Despite the challenges, China's transition to sustainable growth drivers opens up opportunities for new businesses. Emerging strategic sectors such as the green economy, digital economy, advanced manufacturing, and semiconductor manufacturing could offer significant growth potential. Businesses that align with these sectors could benefit from the shift in China's economic focus.
In conclusion, while China's economic challenges pose risks, they also present opportunities for new businesses. Navigating this landscape will require strategic planning, adaptability, and a keen understanding of market dynamics. Businesses that can adapt to these changes and tap into the emerging growth sectors may find success in China's evolving economy.