Global Economic Outlook – September 2022 Economic activity showed a recovery in June as the The government has maintained its overall real estate policy Omicron outbreak came under control. However, summer that ‘housing is for living in, not for speculation’. Although travels led a resurgence of infections in some cities, the property market is facing considerable headwinds, and the daily new cases (including asymptomatic cases) China’s increasing urbanization and households’ growing increased to over 2,000 in mid-August from below 100 at demand for quality homes should support the market in the the end of June. Growth in industrial production slowed long run. and manufacturing purchasing manager index (PMI), a leading indicator, fell into contraction territory again in July. Infrastructure investment has become the key driver to Meanwhile, the most severe heatwave in six decades hit support economic growth. The government has speeded up many areas this summer, sending electricity usage up the issuance of local government special bonds (LGSBs), 6.3% in July – the fastest growth since last September. The a major funding source for infrastructure investment. drought also caused a shortage of hydropower production in By the end of July, the government had issued a total some places, weighing on industrial production. of RMB 3.47 trillion LGSBs, 95% of the annual quota. The pace of issuance was much faster than in previous The recovery of consumption is still slow and is subject years. Infrastructure projects such as water conservancy, to the pandemic evolvement. Growth of the retail sector transportation and urban renovation have seen fast growth. rebounded to 3.1% in June from -11.1% in April, but We expect infrastructure investment to remain strong in the it moderated again to 2.7% in July due to the recent second half of this year. resurgence. Besides the pandemic, household expectations for job security and income growth are important drivers to consumer spending. The government has taken various Chart 20: Cumulative issuance of local measures to keep the job market stable, and the urban government special bonds in recent years surveyed unemployment rate dropped to 5.4% in July from 6.1% in April. We expect the unemployment rate to 4,000 average at 5.4% in 2022. Income sentiment and consumer confidence will likely improve in H2, supporting a gradual 3,500 recovery of consumption. 3,000 2,500 Meanwhile, the real estate market faces continued pressures. Liquidity is a key challenge for developers, 2,000 especially those with high leverage ratios. Funding pressure RMB billion 1,500 has caused some developers to suspend construction of pre-sold houses, causing some homebuyers to threaten to 1,000 stop making mortgage payments. We estimate the overall 500 exposure of banks to the troubled projects is still relatively 0 small, but possible contagion risks should be monitored. Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec The government has taken actions to stabilize the market. 2019 2020 2021 2022 On the demand side, many local governments have relaxed restrictions on property purchases, cut mortgage rates Source: Ministry of Finance, Wind, KPMG analysis. and lowered down-payment ratios. On the supply side, some cities are setting up relief funds to help developers with liquidity issues. The central bank also plans to provide targeted credit support to distressed developers to ensure delivery. © 2022 Copyright owned by one or more of the KPMG International entities. KPMG International entities provide no services to clients. All rights reserved. 21