Global financial crash fears as China economy slows amid property nightmare

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The world’s second largest economy has been the focus of much attention over the huge debts acquired by some of its companies such as Evergrande and Kaisa who have both defaulted in recent weeks. A range of data today now suggests wider issues for the Chinese economy though as fallout from a struggling property sector spreads and Covid restrictions begin to increase. Retail sales have slowed, with growth dropping from 4.9 percent in October to 3.9 percent in November. Craig Botham, Chief China+ Economist at Pantheon Macroeconomics said: “Zero-Covid remains a challenge for retail sales, and a December spike in cases is set to weigh on year-end performance.

“Omicron looks highly likely to be spreading within China, after a local man completed quarantine on return from international travel, flew domestically, and was then found to have the new variant while in a second round of local quarantine.

“Given the greater apparent transmissibility of Omicron, this implies more frequent lockdowns in the months to come.”

As with retail China’s industrial output has been overshadowed by Covid with factory closures taking place in Zhejiang province.

Industrial production saw a slight improvement rising to 0.4 percent month on month in November however the reading still ranks as one of the weakest on record.

China is also experiencing a slow down in investment with infrastructure investment falling to 0.5 percent year on year in November and manufacturing down to 13.7 percent growth from 14.2 percent in October.

Unsurprisingly property investment has also taken a hit with investment growth falling from 7.2 percent year to date in October to six percent in November.

Following the struggles of firms such as Evergrand and Kaisa, a fresh blow came this week as shares in developer Shimao tumbled 20 percent over debt concerns.

Amid the worries over the property industry house prices fell 0.33 percent in November.

Mr Botham said: “Deterioration is not a surprise, in the context of ongoing collapses in sales, and discounting by developers desperate to meet debt repayments and other liabilities.

“It adds pressure to the broader sector, and is an obvious channel for contagion from Evergrande (and now also Kaisa, Aoyuan, Fantasia, and most recently Shimao) to other developers, for whom sales remain the key, if plummeting, source of revenue.”

The impact on house prices seems to be spreading around the country with only nine out of 70 cities tracked by China’s statistics bureau seeing any monthly gains in prices.

With property accounting for around 30 percent of China’s GDP any issues here are likely to become a major drag on national growth.

Daniele Antonucci, chief economist and macro strategist at Quintet Private Bank, suggested despite the sharp deterioration of recent months data was showing “some degree of stabilisation” though.

Mr Antonucci pointed to strengthening exports and a narrowing in the decline of property sales volume and construction starts.

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He added that the stabilisation was a “welcome respite from the slowdown of previous months” with there now being “far less risk of a significant contraction in the economy, both in China and globally”

However he cautioned: “The property figures suggest that the sector is stabilising at a low level rather than rebounding to previous highs.”

In a briefing note Saxo Bank commented “Declines are putting more pressure on the government to stabilize the economy and banks are already lowering their mortgage rates to support the housing market.

“The central bank has also shifted to easing mode and the government has announced more fiscal stimulus.”

Today a move by the People’s Bank of China comes into effect cutting the amount of cash banks have to hold in reserve in a bid to boost the economy.

The change to the Reserve Requirement Ratio is expected to enable banks to release around 1.2 trillion yuan (£142billion).

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