China Market Sentiment Still Downbeat Despite Beijing’s New Efforts to Boost Economy: Experts

A residential complex built by Chinese property developer Country Garden is seen in Nanjing, in China's eastern Jiangsu Province, on Aug. 31, 2023. (STR/AFP via Getty Images)

Country Garden’s dollar debt payments on Monday and Beijing’s new efforts to help China’s beleaguered real estate sector appear to have spurred some newfound hope in the country’s financial markets.

However, the recent policy tweaks could be ineffective for China’s economy, according to Capital Economics, a London-based independent economic research firm.

Business activity in China’s services sector plummeted to its lowest level in eight months in August. Data released by the Caixin China General Services show that the purchasing managers’ index (PMI) fell to 51.8 in August from 54.1 in July. Expansion is indicated by a number more than 50, whereas contraction is characterized by a number less than 50.

“The slowdown in business activity coincided with a weaker increase in overall new business. New orders increased modestly, and at a pace that was below the average seen for 2023 to date,” Caixin said in a statement.

Following last week’s dip in the official nonmanufacturing PMI to 51.0 in August from 51.5 in July, Caixin’s sliding PMI indicates that weakening services still weigh heavily on the economy amid slow demand and a property slump.

To revive slowing growth, Beijing recently released a slew of measures, such as lowering key interest rates and bank lending rates to boost spending, and extending tax relief for small businesses and rural households. Regulators also eased borrowing rules to help homebuyers, such as relaxing home purchase restrictions and lowering the mortgage rate and down payments for first-time buyers in some cities.

In another development, Country Garden paid interest payments on two U.S. dollar bonds on Tuesday, just before the 30-day grace period expired, providing a brief reprieve to the beleaguered developer and the crisis-hit Chinese property market.

‘False Dawn’

Yet analysts say these policies, and the Country Garden payment, may make little difference to the economy in the face of a sluggish labor market recovery and uncertain household income expectations.

“New measures to revive China’s struggling economy seemed to have sparked some renewed optimism but that may be another false dawn in China’s markets,” said Capital Economics in a client note on Monday.

According to the research firm, the relaxation of the recent regulations and the attempt to shore up mortgage holders’ finances appear as poor substitutes for “some monetary easing.”

And while the policy tweaks could reduce the need for big rate cuts, “China’s economy seems to have real big problems, [even as] investors are [turning] skeptical about policymakers’ willingness to do what it takes to support growth,” the note said.

As policymakers try to fix the slump in China’s economic growth, concerns are mounting over whether the world’s second-largest economy is coming closer to a crunch.

Reasons for China’s Economic Woes

While there are several reasons why China’s economy is slowing down, the property market crash has been the economy’s biggest blow.

The Chinese economy relies disproportionately on the real estate sector for jobs and growth. Yet the industry is facing a downturn due to high debt levels, regulatory tightening, and weak demand.

The problems of Country Garden, China’s largest property developer, have raised concerns about systemic risk and a spillover effect on other industries. The downturn has already reduced household wealth, spending, and local government income, with repercussions in other sectors.

The COVID-19 lockdowns also dealt a blow to the economy. The Chinese Communist Party’s (CCP) draconian zero-COVID measures disrupted supply chains and caused businesses to close, further dampening economic activity.

The trade war between the United States and China, which began in 2018, was another factor in the slowdown, as tariffs placed by both nations made it more expensive for businesses to trade with one another, creating uncertainty in the global economy.

China’s population is increasingly aging, putting strain on the economy. The diminishing working-age population is having a snowball effect since fewer people paying taxes equates to less economic support.

The country’s high debt burden—expected to reach 84 percent of its GDP in 2023, according to Trading Economics global macro models—has also been a significant drag on economic growth. If Beijing is unable to reduce the debt load, it might eventually lead to a financial disaster for the country, according to experts.

Need for Faster Policy Response

Although the CCP has been proposing policies to boost the economy, experts believe its efforts are slow, the measures are inadequate, and authorities need to do more.

“From a macro perspective, the top-down policy roll-out from the central government, compared with selective and localized support, is significant,” said Moody’s in a client note on Monday.

“While a stabilization in the market would be positive to China’s short-term growth, the effectiveness of the property sector’s boost to the overall economy would be subject to interplay with other policies and how they restore confidence and income growth expectations,” the note added.