China’s manufacturing investment will be weaker than expected, which may pose a headwind to the country’s economic growth this year, Citi economists said in a new report.
Bloomberg reported on May 6 that manufacturing is the slowest growing sector in China’s overall investment, with spending in the first quarter still below the 2019 level.
Manufacturing profits, a major source of investment capital, fell sharply last year, with profit margins for many companies in the industry squeezed by rising commodity prices and the resumption of social security contributions after the Communist Party’s viral outbreak, Citi economists said in a report.
Citi economists said manufacturing investment is likely to fall short of previous expectations, which will have a “considerable impact” on expectations for China’s GDP growth this year.
They said that while strong performance in the real estate sector has pushed profit margins in industries such as steel and cement up sharply, more government investment in pollution control and emissions reduction will keep capacity expansion in check this year.
Chinese exporters are still reluctant to increase investment despite the sharp growth in Chinese exports during the Communist virus outbreak. China’s export growth is widely expected to slow in the second half of this year as consumer spending in developed Western countries will return to services.
In addition, China’s other two main drivers of investment will also face headwinds. Local government bond issuance, the main source of funding for infrastructure spending, continues to be below the levels of previous years. The Communist government is tightening regulations on the debt ratios of property companies, and that could have an impact on their investment spending.
In a report this week, Societe Generale economists said, “We expect downward pressure on housing sales in first-tier cities and nationwide real estate investment to begin to increase.”
Last week, the Communist Party’s top leadership stressed the need to push through various reforms aimed at curbing rising home prices, increasing regulation of technology companies and strengthening oversight of local government debt.
All of this could reduce economic growth in the short term, Bloomberg reported.
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