Uncontrollable debt build-up creates fear: worse than Japan in the 1990s?

Uncontrollable debt build-up creates fear: worse than Japan in the 1990s?

Investors are waiting on Asian stock exchanges after the drama in Russia at the weekend, but there is no sign of panic. The Nikkei index on the Tokyo Stock Exchange started the week slightly lower, but reversed after two hours of trading. The main index has risen about 30 percent since the new year.

China’s stock exchanges were closed ahead of the weekend. The mainland index in Hong Kong Stock Exchange fell more than six percent. On Wall Street, the Nasdaq Golden Dragon China Index, which includes Chinese companies that do most of the activity in mainland China, fell 8.6%.

Oil prices are stable in Asian trade. The uncertainty surrounding the Chinese economy is of greater concern as the first half of the year approaches.

– A difficult situation

Many major financial institutions have lowered growth forecasts for China. Goldman Sachs, Nomura and JPMorgan issued fresh warnings. Bank of America believed in 6.3 percent growth through mid-June. The consensus is for full-year economic growth of just over five percent.

S&P Global will be released last Monday morning with forecasts for a cut of 5.5 percent to 5.2 percent.

– The Chinese rise should continue, but at an uneven pace. Investments and industry lag behind, S&P Global writes in the report.

China’s post-epidemic reopening was expected to lead to a full-blown party. It doesn’t. China’s central bank cut several key interest rates in the past week, the 0.1 percentage point cut seen as more symbolic than effective.

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— The rapid impact of reopening may diminish as demographics, a long-term downturn in the real estate market, local government debt problems and geopolitical tensions may become more significant in China’s growth prospects, Goldman Sachs wrote in its latest update, lowering its growth forecast by 0.6 percentage point. – to 5.4 percent for 2023.

The authorities have made it clear that the era of massive measures to boost the economy is over. More than $500 billion was injected into the economy during the financial crisis in 2008. This resulted in huge bubbles in the real estate market, among other things.

– It’s a very difficult situation, Zhikai Chen, head of Asian and emerging growth markets at BNP Paribas Management, tells Bloomberg.

Sentiment among Chinese consumers and business leaders couldn’t be worse, said analyst Oivin Rimmer at Harbor Asset Management, who has spent the past two months in the country.

“Something’s completely ruined,” Rimmer adds New Zealand Herald.

The same mistakes can be repeated

New real estate investment fell 7.2 percent in the January-May period. Real estate prices continued to fall and the number of large real estate developers decreased. Comparisons are being made to what happened in Japan in the 1990s when the country entered two lost decades.

“Unfortunately, it appears that China may repeat the same mistakes. The authorities would rather direct stimulus towards investment. The central bank cuts interest rates, but cautiously by one-tenth of a percentage point at a time. China may also be in a worse position than Japan was,” he writes. The Economist In the latest edition, it shows that private consumption makes up only 38 percent of the economy – compared to 55 percent on average in the world.

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According to the Wall Street Journal, an issuance of special government securities is being considered, in addition to the regular government budget, of NOK 1,500 billion to fund infrastructure projects. This has only happened three times before in China.

success or failure

Many Chinese cities and municipalities have traditionally funded their budgets with land sales to real estate developers. They have also been actively involved in real estate ventures with their own companies, often with private investors. There are huge debt bombs here.

The debts and liabilities of the 2,892 LGFVs (Local Government Finance Vehicles) registered in 2022 amounted to more than 59 billion yuan (89 thousand billion kroner) at the end of 2022. In all, they paid 2,900 billion yuan in interest costs, according to Rhodium Group.

The analysis firm believes that the problems in municipalities and investment companies are the main reason for the central authorities’ failure to provide effective support measures for the economy.

Written by Allen Feng and Logan Wright of the research firm V.E the report “tapped”.(conditions)Copyright Dagens Næringsliv AS and/or our suppliers. We’d like you to share our statuses using links that lead directly to our pages. Reproduction or other use of all or part of the Content may be made only with written permission or as permitted by law. For more terms see here.

Dalila Awolowo

Dalila Awolowo

"Explorer. Unapologetic entrepreneur. Alcohol fanatic. Certified writer. Wannabe tv evangelist. Twitter fanatic. Student. Web scholar. Travel buff."

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