China's economy will soon face new worries

China will continue to face pressure to implement economic reforms later next year, as the impact of 1 trillion yuan ($137 billion) of government bonds begins to fade, according to foreign financial institutions.

China will face more pressure by the end of next year when the impact of 1 trillion yuan ($137 billion) of government bonds begins to fade. (Source: Xinhua)

Last month, China approved the issuance of 1 trillion yuan in new government bonds, marking the first budget adjustment in years aimed at bolstering confidence amid bleak signs of economic recovery.

The fiscal adjustment widens China's 2023 budget deficit target from 3% to 3.8% of GDP.

Capital Economics said that the last time Beijing adjusted the national budget was after the devastating Sichuan earthquake in 2008. The additional funds will be used to rebuild disaster-hit areas and control floods, reduce rising local government debt and reduce the main source of revenue from land sales, and are expected to maintain economic stability until 2024.

However, international financial institutions believe that the real estate market, youth unemployment and local government debt will likely slow China's economic growth from 2025 onwards.

“I think it’s a clear signal of a shift towards more fiscal support for the economy next year and probably the clearest signal we’ve had in the entire cycle,” said Chris Beddor, deputy director of China research at macroeconomic research firm Gavekal Dragonomics.

China's nominal gross domestic product (GDP) could increase by about 1 percentage point from bond issuance, he added.

“Local officials may not face the same pressure to implement reforms now that the central government is taking on a bigger role, but that does not bode well for potential growth in the medium to long term,” he said.

Many investment banks and institutions predict that China's economic growth rate will be even lower after 2024 because bond issuance will not be able to solve fundamental problems.

“A trillion yuan, while not a drop in the ocean, is a one-off,” said Heron Lim, assistant director and economist at Moody’s Analytics. “China’s mid-term budget adjustment is rare, so this is more of a fiscal stimulus.”

According to Moody's Analytics, China's economy will grow 4.9% in 2024 and 2025, but then slow to just 4.3% in 2026. Meanwhile, Fitch Ratings forecasts growth of 4.8% next year and 4.7% in 2025.

DBS Bank predicts 4.5% growth in both 2024 and 2025, while HSBC's outlook puts growth at 4.6% next year, then 4.4% in 2025.

Alicia Garcia-Herrero, chief Asia- Pacific economist at French investment bank Natixis, forecast in a June report that China's average annual growth rate would reach 4.9% from 2021 to 2025 and 3.6% from 2026 to 2030.

The real estate market is expected to remain sluggish and is one of the main challenges facing the economy.

Since 2020, the Chinese government has tried to reduce systemic risks from overleveraged developers by removing weaker ones from the loan and bond markets. But China’s largest property developers, including Country Garden and Evergrande, have all defaulted.

Government debt is also likely to “rise further” while local finances are under pressure amid “weak” land sales and higher spending needs, Fitch Ratings said. Fiscal uncertainty has challenged local governments to service their debt, raising concerns among policymakers and investors.

China's export- and investment-driven economy grew by nearly 10%, maintaining a year-on-year growth rate from 2002 to 2011. However, the impact of the Covid-19 lockdown has significantly affected the world's second-largest economy.

Officials say economic downturns in many countries - China's main export buyers - and external problems are barriers to GDP growth.

Source