Investment Strategies

Risks To China's Growth Outlook Grow - Bank Of Singapore

Editorial Staff, 12 November 2021

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The Singapore-based private bank added its voice to those lenders mulling the outlook for the Chinese economy in a week that saw more drama around Evergrande, the large property development group facing severe financial pressures.

With economists and central banks starting to think that China’s economic woes will hit the rest of the world, another bank has added its thoughts to whether the globe’s second-largest economy could lose its lustre.

China Evergrande Group, the debt-laden real estate developer, has stumbled through a series of debt repayment deadlines, narrowly averting default, although risks remain. Its woes have spooked Chinese and international debt markets, prompting even the US Federal Reserve to highlight risks. 

China’s gross domestic product is set to expand by 7.9 per cent in 2021, Bank of Singapore said in an investment note. BoS’s forecast for China to return to its long-term growth rate of 5.5 per cent in 2022 “appears at risk,” it said, following economic data releases for October.

“The bigger risk is if China turns inward, fails to reopen to the outside world in 2022, keeps its zero-cases strategy to the virus and still slows borrowing to be resilient to external shocks. Since the summer, China’s V-shaped rebound has faded,” Bank of Singapore said. “Strict lockdowns have hurt consumption. Power cuts have hit industrial production. Regulatory restraints on real estate developers have curbed property investment and slower local government borrowing for new projects has held back infrastructure investment.”

Bond yield spreads – often a tell-tale sign of financial stress – have risen between an index of Chinese junk dollar bonds, which are dominated by property firms. Yields have soared towards 24 per cent (source: Bloomberg, 9 November). Evergrande's situation has been weighing on investors' minds for some time. (See a report from late September.)

At the start of this week, the US Federal Reserve warned in a semi-annual report about the risks the Evergrande saga posed to global markets.

“Given the size of China’s economy and financial system as well as its extensive trade linkages with the rest of the world, financial stresses in China could strain global financial markets through a deterioration of risk sentiment, pose risks to global economic growth, and affect the United States,” the Fed said.

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