China's economy has many positive signs

Credit demand in China is increasing, deflationary pressure is easing and the yuan is strengthening, showing that this market is gradually stabilizing.

On September 11, the Central Bank of China (PBOC) announced data showing that the country's credit situation improved in August. Credit institutions lent 1,360 billion yuan in new loans, higher than forecasts of economists. Previously, PBOC continuously urged banks to increase lending.

The data suggests that China's recent efforts to strengthen its real estate market may be driving up demand for home loans. The Yuan also strengthened yesterday after PBOC's moves to protect the local currency.

These are the latest optimistic signals for the Chinese economy. Last weekend, the country's August consumer price index (CPI) increased again after decreasing in July . Deflation at factories has also narrowed.

Inside a shopping mall in China. Photo: Bloomberg

The world's second largest economy is trying to regain growth momentum in the context of the ongoing real estate crisis and weak confidence dragging down recovery momentum. The improved August figures show that July may have been the country's bottom. Last month, China's CPI fell and banks' outstanding loans also fell to a 14-year low.

The CSI 300 index on the Chinese stock market increased 0.7% on September 11, ending a series of four consecutive losing sessions. The Yuan also strengthened after falling to a 16-year low against the USD last week. The reason is that PBOC resets the daily reference rate and warns of speculative moves.

With the real estate market, the Chinese government has also reduced reference interest rates, reduced home loan interest rates and relaxed prepayment regulations for home purchases to support the recovery. Economists at Goldman Sachs estimate that the policies announced so far could lift China's GDP by 0.6%.

"New policies have helped the economy stabilize. The key now is how long the growth momentum can be maintained," Zhang Zhiwei - chief economist at Pinpoint Asset Management commented on Bloomberg.

The question now is whether the country's real estate sector can have a turning point, thereby raising confidence in the economy? Goldman Sachs believes that "recent policies may create a short-term increase in real estate transactions, but are not enough to stabilize the real estate market."

They predict that China will launch more loosening policies in the near future, such as reducing interest rates or other measures to support the real estate market, if home sales continue to decline and growth slows.

China's annual GDP growth rate since 1976. Graph: Bloomberg

Last month, new loans from households in this country increased. However, they are still far below the August 2022 record and pre-pandemic levels. Ming Ming - chief economist at Citic Securities, said that improving lending in general depends largely on the bond issuance activities of local governments.

Local governments in China accelerated borrowing to finance infrastructure projects. While this may support economic growth, it will also put pressure on financial markets.

China's economy is not completely free from risks. There are many signs that service industry growth is slowing. Previously, this was the driving force for China's economic recovery.

In the context of manufacturing and real estate decline, some components of this economy are still booming, such as electric vehicles, solar power, wind power and batteries. In these sectors, investment and exports grew at double-digit rates.

Tourism and restaurants are also booming compared to last year's lockdown. Starbucks recorded a 46% increase in revenue in China last quarter. Domestic flights are now 15% busier than before the pandemic. To maintain this growth, experts say that China may need more policies to boost household spending.

Deflationary pressure has not completely disappeared. The country's consumer price index is still far below the target of 3% for the whole year.

Analysts are cautious. Yesterday, PBOC announced that it would protect the yuan. According to Alex Loo - macro strategist at TD Securities, this shows that they "will not be able to stand aside".

However, he said the agency may need to take further action to maintain market euphoria. "Without additional significant fiscal support from the authorities, the yuan cannot reverse its downward trend and the upward momentum will only last in the short term," he concluded.