Thursday, August 24 2023

The growth trajectories for the global economies remain mixed and are diverging across regions amidst moderating but still “over-the-target” inflation, tight financial conditions, simmering geopolitical conflicts, and geoeconomic fragmentation. China’s central bank cut the one-year loan rate by 15 bps to 2.5%, which was followed by July2023 data indicating weak consumer spending, declining investment, and increasing unemployment. As highlighted by Tao Wang, M.D. and Chief Economist, UBS Hong Kong “China's overall debt-to-GDP ratio is about 300% and rising, which is the highest among emerging markets and higher than most advanced economies as well. While China's central government debt is relatively small at just above 20% of GDP, debt at the local government level is estimated to be more than 70% of GDP. Moreover, many local governments do not have enough cash flow to pay interest on their debt. Some parts of the corporate sector, especially the property developers, are also now facing severe challenges to service their debt given the deep property slump.”1 Despite the State ownership of the banks and the government's guarantees on deposits, a worrisome factor is that debt has been consistently rising faster than output over a prolonged period and a growing share is allocated to nonproductive sectors.

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