TS Lombard has a crack:
The path from last year’s growth slump back to economic normalization is becoming increasingly bumpy. On top of Xi Jinping’s “common prosperity” drive and crackdown on internet platform firms, Covid’s Delta variant and the impending fall of the property behemoth Evergrande are new upsets. Under China’s “zero-tolerance” policy on controlling Covid, new infection outbreaks inevitably lead to strict lockdowns even with relatively small numbers of cases. The impact of these restrictions in August was exacerbated by extreme weather conditions in several regions and the global chip shortage in the auto industry. In particular, growth in retail sales and industrial production in August was affected: retail sales volume growth fell to 2.5% yoy from 8.5% in July while industrial production eased to 5.3% yoy vs 6.4%.
Looking ahead, Evergrande’s demise is likely to provide the biggest shock to the economic outlook. With selective defaults on interest and principal happening virtually every day, a broader payment stop is imminent. The tangled web of the firm’s obligations to banks, bondholders, suppliers, investors in wealth management products and homeowners poses the economy’s biggest financial risk and is a source of contagion that already rippling through the economy. The authorities will seek to minimize systemic risks from this crisis, especially deflationary pressures that could result from fire sales of Evergrande assets as this would depress housing prices, adversely affecting the viability of other firms in the property sector while eroding the household wealth. Indeed, Evergrande has already been instructed to meet its pre-sale obligations to purchasers as a first priority. A different risk, though, is facing the entire property sector: potential new home buyers will be increasingly reluctant to advance their life savings to other real estate firms in pre-sale deals, particularly if they no longer expect housing prices to rise. And since such firms currently depend on pre-sales for over half of their financing, a the ongoing slowdown in property activity will be exacerbated next year.
