From energy to drinking water, China has lots to fix in its economy

CNN

By Laura He, CNN Business

China has unveiled 19 new measures to shore up its economy and “secure drinking water” supply as the country continues to struggle with its worst heatwave in 60 years and rigid Covld lockdowns.

The new measures announced by China’s cabinet on Wednesday amount to more than 1 trillion yuan ($146 billion) in funding to improve infrastructure, ease power shortages, and tackle drought, including money to secure rice production.

“The current economic recovery has a weak foundation,” the statement said, adding that the new funding was aimed at stabilizing the economy. Premier Li Keqiang hosted the cabinet meeting.

Beijing has tried to boost investment and consumption in the world’s second largest economy more than once this year. In May, the government announced 33 measures to revive growth.

Despite these interventions, the Chinese economy has deteriorated in recent months because of Covid lockdowns and a deepening property downturn. Analysts are also concerned about the impact China’s record-breaking heatwave and drought will have on growth. Already, several international businesses, including Tesla and Toyota, have faced disruption at factories due to power outages.

Several major investment banks, including Goldman Sachs and Nomura, downgraded China’s economic growth forecasts for 2022 to 3% or under, as the heatwave hit industrial heartlands. This is way below 5.5% growth target that the Chinese government had set earlier this year.

China’s biggest focus remains infrastructure growth.

With the central bank’s support, state development banks can lend out $44 billion to finance infrastructure projects, the statement said. That’s on top of $161 billion already committed in June.

Local governments will also be permitted to issue $73 billion in debt to fund the building of roads, railways, airports, affordable housing and energy projects. That’s in addition to 3.5 trillion yuan ($511 billion) of bonds they were given permission to issue for the same purposes earlier this year.

Li also urged all government departments to “do a better job” in battling the drought and mitigating its impacts. He called for more wells to be drilled, and more drought-resistant water sources to be developed, in addition to seeding clouds, which China resorted to earlier this month to bring more rainfall to the Yangtze River.

“Priority should be given to ensuring people’s drinking water, and to transport and deliver the water when necessary,” Li added.

The central government will also take 10 billion yuan ($1.5 billion) out of its reserve fund for drought relief, focusing on securing rice production during the key mid-season harvest for rice in the southern region.

“[We should] do everything possible to ensure agricultural irrigation water and help farmers fight the drought and protect their autumn crops,” Li said.

The government will support research into measures to promote a “bumper harvest” for late-season rice in the fall, he added.

Analysts weren’t optimistic about the impact of the new economic stimulus on the economy.

“These measures could help offset the sharp contraction in government revenue and support infrastructure investment growth to some degree in coming months,” said Goldman Sachs analysts in a note late Wednesday.

But they still expect overall growth to remain sluggish during the rest of this year, “barring major policy easing measures,” as a “very weak” property sector and headwinds from Covid lockdowns will continue to drag on the economy.

Trouble in the property sector — which accounts for as much as 30% of China’s GDP and was already suffering from a prolonged cash crunch — is exerting significant pressure.

The crisis has snowballed since sprawling developer Evergrande defaulted on its debt last year. Property prices have been falling, as have sales of new homes. Angry homebuyers across the country have threatened to stop paying their mortgages on unfinished homes, jolting markets and prompting businesses and authorities to take action to defuse the crisis.

Nomura analysts said the new stimulus measures wouldn’t be a “game changer.”

“The zero Covid policy continues consuming a large amount of local governments’ fiscal resources,” they said, adding that he property sector is “still in deep trouble.”

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