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China’s economic recovery flounders amid debt, property slump and more – Is a major government stimuluslikely?

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China’s efforts to recover from an extended COVID-19 lockdown appears to have come to a stuttering halt amid a confluence of problems. Market participants are now waiting anxiously for policy measures to prop up the economy, with many wondering whether the country is headed for a Japan-style malaise after 30 years of unprecedented economic growth. 

According to reports citing analysts, July will be a “key policy window” for Chinese markets, with investors hoping for policies that can lead to credit expansion. Beijing’s typical playbook of using large-scale stimulus to boost demand may however prove to be ineffective at this time, having led to massive oversupply in property and industry, and surging debt levels among local governments.

What exactly is the problem?

China is facing a slew of issues including sluggish consumer spending, a crisis-ridden property market, flagging exports, record youth unemployment and towering local government debt. The impact of these strains is starting to reverberate around the globe, impacting everything from commodity prices to equity markets. The risk of Fed hikes tipping the US into recession has also heightened the prospect of a simultaneous slump in the world’s two economic powerhouses.

What are the latest updates?

  • China and Hong Kong stocks notched small gains on Tuesday as investors bet the country would take more measures in July to shore up its economy.
  • The National Development and Reform Commission – China’s top economic regulator – has pledged to tackle issues faced by enterprises and create a better development environment for the private sector.
  • China’s central bank has continued to lend support to prevent the yuan from weakening too fast and too far. 
  • China’s yuan finished the domestic session at a one-week high against the dollar on Tuesday as the People’s Bank of China (PBOC) set a stronger-than-expected official midpoint rate. In addition, major state banks lowered their dollar deposit rates for the second time in a month.
  • “While it may take time to prepare the deployment of a massive stimulus package to mitigate under-delivery risk until the Politburo meeting at end-July, imposing a yuan fixing counter-cyclical factor to buy some time maybe a feasible policy option,” said Ken Cheung, chief Asian FX strategist at Mizuho Bank, referring to the much strengthened guidance rate.
  • Chinese firms’ dollar-bond issuance hit the lowest level in a decade during the second quarter, and there are few near-term catalysts to reverse the trend as cheap onshore borrowing costs and economic uncertainty persist.
  • Chinese President Xi Jinping’s elevation of a long-serving technocrat as the central bank’s top Communist Party official also signals that policy makers will avoid any drastic shifts for now as the world’s second-biggest economy struggles to regain momentum.

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