Will China be able to restore consumption in the new year?

The real estate sector is a pillar for China's economy, accounting for about 30% of its GDP. But with the economic slowdown and rise in unemployment - initially driven by the zero Covid policy and now with the surge in Covid cases, most Chinese are becoming reluctant spenders

The new year will continue to be challenging for China's economy even as Beijing made it clear that its focus would be on reviving consumption. It is noteworthy that though Beijing had a similar target even during 2022, it failed to make any mark and going by the present macro-economic indicators, demand, especially related to the real estate sector will continue to remain muted even in 2023. The failure of real estate behemoths Evergrande Group and Shimao Group in 2021 led to a slump in demand for new homes in 2022.

The real estate sector is a pillar for China's economy, accounting for about 30 per cent of its GDP. But with the economic slowdown and rise in unemployment - initially driven by the zero Covid policy and now with the surge in Covid cases, most Chinese are becoming reluctant spenders.

"The surge in Covid cases has further impacted spendings, the Chinese consumers are trying to reduce their expenses as much as possible amid rising uncertainty," a person with business interest in China said.

"Sentiments are at an unprecedented low level," he pointed out. The worry is that the impact of the same may even hit the banking sector. According to Bloomberg, China's property sector has about $292 billion of onshore and offshore borrowings that will need to be cleared by end 2023. However, an amount of $72.3 billion is due in the coming quarter.

Though real estate stocks in China have been performing reasonably well this month after Beijing announced a slew of measures, including the three arrows policy - bank credit, bond issuance and equity financing, things may take time to iron out.

S&P Global Ratings in a report published earlier this month said non- performing assets arising due to the beleaguered real estate sector "will stay elevated in 2023".

The report also said that China's home prices will likely decline by up to 8 per cent in 2023, after falling 6 per cent this year. The lower-tier cities will be the worst impacted with higher inventory levels. This may even pose "higher credit risk on banks servicing those regions".