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China may chalk up more debt as lockdowns hit the economy

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China’s economy has been greatly affected by the covid lockdowns. The Asian giant may need to increase its debt in order to reach its growth goals.

Kevin Frayer | Getty Images News | Getty Images

China might have to increase its debt to continue growing in spite of Covid lockdowns, which are limiting its growth.

In recent weeks, the country indicated that it wants to reach its 5.5% growth goal for this year.

China’s Politburo Meeting on April 29 was a signal that China’s policymakers were committed to the GDP target despite geopolitical tensions and COVID-19 disruptions, ANZ Research Analysts wrote in a separate note.

China might borrow more money in the future to achieve the target 5.5%.

The Politburo meeting was reported by Chinese state media Friday. Officials promised to increase support for the economy in order to achieve the country’s annual economic growth goal. This support could include tax reductions and rebates as well as infrastructure investments, measures to increase consumption and other relief measures.

This is foreign investment. banks are predicting growth will fall significantly below the 5.5% numberWith manufacturing activity falling in April, this is a sign of things to come.

Market watchers predict that China will continue to accumulate debt in order to reach its growth targets.

According to ANZ Research’s Betty Wang, senior China economist and Zhaopeng Xing, senior China strategist, “China could borrow from the future to achieve the 5.5% target and incur more loans.”

CNBC Pro has more information about China

CNBC heard last week from Andrew Tilton of Goldman Sachs’ Asia-Pacific chief economist that China was planning to increase infrastructure spending.

According to Beijing, expanding such fiscal spending, as well as easing debt restrictions, would be better than monetary ease, he said on CNBC’s “Squawk Box Asia.”

Tilton stated that one obstacle to infrastructure investments by the government would be Covid-related restrictions, which are being placed everywhere.

“There are a lot of restrictions around the country even in some cases in places where there aren’t any Covid cases — more precautionary in nature,” he said. Covid restrictions should be targeted at the most critical areas of infrastructure. This is what will hinder the campaign to build it.

Tilton suggested that the government could issue special local bonds.

These bonds are created by regional and local governments in order to finance public infrastructure projects.

Tilton stated that the government is encouraging developers to get loans in the struggling real estate market.

Beijing would take a backward step if it borrowed more money to stimulate growth. Beijing has already been working to reduce its debt since before the crisis. With the introduction of the “three lines policy”, the government is targeting the property sector. This is to curb developers’ excessive growth. It places limits on debt relative to cash flows, assets, and capital.

But, this led to a crisis in debt late last year when Evergrande and others started defaulting on their debt.

Economic shocks and GDP forecasts

Chinese President Xi Jinping last week called for an “all-out” effort to construct infrastructure, with the country struggling to keep its economy humming since the country’s most recent Covid outbreak began around two months ago.

Restrictions have been imposed in its two largest cities, Beijing and Shanghai, with stay-home orders slapped on millions of people and establishments shut down.

China’s zero-Covid restrictions have hit businesses hard. Nearly 60% of European businesses in the country said they were cutting 2022 revenue projections as a result of Covid controls, according to a survey late last month by the EU Chamber of Commerce in China.

Among Chinese businesses, monthly surveys released in theLast week showed sentiment among manufacturing and service businesses fell in April to the lowest since the initial shock of the pandemic in February 2020.

Data released on Thursday showed that the Caixin services purchasing managers’ index, which is a private measure of China’s manufacturing activity, fell to 36.2 in April. It’s still well below the 50 points that distinguish between contraction and growth.

Already, the country’s Zero-Covid Policy and Slowing Economy have sparked predictions from investment banksAccording to analysts, its growth is likely to be lower than the 5.5% target.

Weather forecasts can be ranging from more than 3% to around 4.5%.

Stephane Monier (Chief Investment Officer, Swiss Private Bank Lombard Odier) stated that due to the Covid epidemics’ effect on industrial output and consumption in the first six months of 2022 we are expecting 2022 GDP to grow closer to 4.3%.

He wrote that if the economy continued to be affected by successive lockdown shocks in key urban areas, then full-year growth will certainly drop below 4%,” in Wednesday’s note.

— CNBC’s Evelyn Cheng contributed to this report.

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