China’s economic recovery has lost momentum, its financial risks are mounting, and the drive for ‘common prosperity’ that helped trigger sweeping regulatory crackdowns has made its stocks all but uninvestable, says research firm Enodo Economics.
The firm estimates China’s third-quarter growth will weaken to 0.9% on a quarter-on-quarter basis, down from 1.3% in the second quarter, wrote its founder, Diana Choyleva, in a research note on September 2.
Expansion is being dragged down by manufacturing and export headwinds and the country’s struggling small and medium-size businesses, she said.
Enodo now considers a rebound to 1.5% in the last three months of the year to be optimistic. The main source of domestic demand weakness is the consumer with the latest data showing confidence plunged in July, the report said.
Consumer confidence is set to take a further battering as President Xi Jinping’s ”common prosperity” crusade is likely to deter spending.
”China’s economic engine is spluttering,” said Choleva. ”Beijing’s policy of zero tolerance of Covid rather than learning to live with the virus is set to keep uncertainty high and frustrate efforts to place the economy on a solid recovery path.”
”Firms are not earning the income needed to service their loans while the non-bank financial institutions that extended them credit are being forced to borrow more on the interbank market,” she said.
”2021 is set to see more SoE debt defaults and probably the first LGFV [Local Government Financing Vehicle] bond defaults, too, as Beijing presses ahead with the de-risking of its financial sector it delayed because of Covid.”
Global supply chain bottlenecks have also hobbled China’s export machine and Enodo expects the continual rerouting and breaking of those chains to be a significant feature of the world economy over the next few years.
Exports were a growth driver for the country in 2020, despite the yuan’s rise, but as the world is vaccinated and lockdowns are eased, global demand is now shifting to services from goods made in China. This move is weighing on exports while China’s domestic demand is hamstrung by the state’s deleveraging push and its strict Covid controls, the report adds.
- By Kevin Hamlin and Sean O’Meara