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‘Secret stock trades, debt misuse mar China’s consumer boom’

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‘Secret stock trades, debt misuse mar China’s consumer boom’

President Xi Jinping’s efforts to engineer an economic recovery have hit a barrier, says The Strait Times and identifies the barrier as the growing tendency of misusing cheap consumer loans the banks are flooding the market under Beijing’s pressure. Some borrowers are taking advantage of the low interest rates to pre-pay mortgages or invest in stocks instead of buying goods, the daily said.

Consumer confidence in China has taken a hit in the wake of Covid-19, with outstanding short-term consumer credit plunging from its peak at the end of 2019, the report by Bloomberg said, and noted that households have amassed a huge pile of savings.

“You can’t just put people up to consume when they don’t even know what tomorrow will look like,” the report said quoting Shen Meng, a director of investment bank Chanson & Co. According to him, when people feel insecure about the future, it’s only natural that they should take precautions in the present to prepare for a rainy day.

The mortgage pre-payment rush, which began in 2022, has gained momentum as Beijing struggles to restore confidence in the slumping property sector.   Citigroup analyst Judy Zhang estimates that Chinese home owners might have pre-paid 4.68 trillion yuan worth of mortgages last year, the report said. The cheap rates on consumer and business loans may also trigger bigger borrowings to repay mortgages.  This trend however indicates a pessimistic view of the average Chinese towards the economy’s prospects.

A related development of significance is the continued fall in property sales across China.   Moody’s Investors Service does not see a change in the scene. In fact, the Moody’s expects that the weakness in housing market will “exacerbate debt pressures on local governments and weaker banks”.

The mainland property sector is still teetering under a mountain of unpaid debts, unfinished homes and stagnant sales, the Moody’s noted and forecast that it will remain soft this year, with negative effects on local government finances.

“Our base case is that property market weakness will persist in 2023, and that the sector’s contribution to the economy will remain materially lower over the next few years than in the past decade,” Martin Petch, vice-president and senior credit officer at Moody’s was quoted as saying in the South China Morning Post (SCMP)

Land sales have accounted for more than 40 per cent of the Chinese government’s revenue since 2018 but last year only 4.7 trillion-yuan worth of plots were sold, down 31 per cent from 2021, according to data from CRIC, a Shanghai-based real estate consultancy.

Mainland developers such as China Evergrande Group, China Fortune Land Development and others have defaulted on loans and abandoned projects in the wake of Beijing’s “three red lines” policy introduced in August 2020, which was aimed at reining in excessive leverage and hot money flows, SCMP report added.