China Economy

What makes the world's second largest economy tick
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Background explainers, news and analysis on China’s economy, including its opening up, the US-China trade war, the impact of tariffs and trade talks, growth rates and other key economic data, the Belt and Road Initiative, and Greater Bay Area plan.

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The breadth of Beijing’s reforms have received much attention, but policy proposals elsewhere show it is far from alone in seeking to put people before profit. However, governments also have to strike a balance between improving equality and achieving growth.
Chinese state-owned enterprises dominate the dam construction industry and are behind some of the world’s largest mining deals. Bold action is needed to adopt clear policies that exclude harmful projects.
Central banks in emerging markets may feel obliged to react to rising energy prices, even though tighter monetary policy won’t necessarily be effective against them. As the People’s Bank of China is no doubt aware, higher interest rates might leave both consumers and companies even more financially vulnerable.
China’s two-decades long real estate boom, which has been a huge driver of wealth, is showing signs of burning out. The potential fallout runs deeper than defaults by property developers.
Power constraints are expected to ease and property deleveraging risks remain low but investor sentiment is unlikely to change unless Beijing significantly eases its fiscal and monetary policies.
To be sure, developing Asia has been hit hard by Covid-19 Delta outbreaks. Yet, none of the central banks has been forced to hike rates to tame inflation. Moreover, they have more inflation-fighting credibility than a decade ago.
Even before Evergrande’s troubles, developers were taking steps to reduce leverage to meet new rules, a tightening of mortgage approvals had dampened housing demand and market concerns over default risks had led to higher financing costs.
Beijing shouldn’t rush to achieve long-term goals – such as reaching net zero carbon emissions and deflating the housing bubble – when the economy is in free fall. It should rethink its zero-Covid, property and coal policies before the risks worsen.
China’s coal supply has been constrained by carbon emission controls and tensions with Australia. Beijing may have to consider relaxing its control over electricity tariffs and reviewing its green policy.
As distressed debt investors eye Evergrande bonds, the narrative around the troubled developer and the yuan is looking less gloomy. Amid power shortages in China, it also makes sense to have a stronger yuan to buy more dollar-denominated energy.
Recent Chinese economic data and global trade figures are an early warning signal that global recovery is slowing in the face of several lingering problems. China should not turn to much looser monetary policy to get faster results, given that fiscal expenditure can be increased without great damage to government finances.
For Hong Kong, the Evergrande crisis and heightened risks on the mainland are the latest threat weighing on leasing and investment activity. Nevertheless, what is striking is how activity in the occupier and investment markets has picked up since the end of last year in the face of persistent challenges.
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