Bank of America cuts China growth forecast under Evergrande shadow

September 21, 2021

By Anushka Trivedi

(Reuters) -Bank of America cut its China growth forecast on Tuesday in response to intensifying troubles at property giant Evergrande, a fresh COVID outbreak and a widespread regulatory squeeze, going beyond warnings issued by other investment banks.

While BofA trimmed its real gross domestic product (GDP) growth forecast for China for this year to 8.0% from 8.3%, it reserved its biggest cut for 2022 to 5.3% from 6.2%. It also trimmed its 2023 outlook to 5.8% from 6.0%.

BofA’s cuts come as economic headwinds have been growing for China’s $14.5 trillion economy and reflect growing concern that Evergrande’s troubles could have a wide impact.

Recent weak data including retail sales and factory output also pointed towards a downturn in the country’s economy due to supply chain bottlenecks and COVID-19, after China posted a stellar recovery from the pandemic last year.

Standard Chartered and ING said last week they considered inadequate policy support as a major downside risk to their GDP forecasts and called for a 50 basis point cut to the central bank’s reserve requirement ratio in the fourth-quarter.

Goldman Sachs cautioned on Monday that further deterioration in the property market would challenge economic policies in 2022 unless China’s growth target was set much lower than 5%-6%.

China’s real estate sector, comprising about a quarter of the country’s economy, has been in the spotlight since the risk of debt-saddled Evergrande defaulting increased, with markets tanking on Monday over its repercussions.

Evergrande has total liabilities of $305 billion with two bond payments due this week, which it is unlikely to fulfil. Its total liability burden stands at less than 2% of GDP, signalling Beijing is well placed to prevent a wider economic shock.

BofA said its base-case scenario of the ongoing problems at Evergrande is “there would be little spillover” effect on the property sector as a whole and financial markets if the government facilitates an orderly debt restructuring.

“Any further delay in policy response from the fourth quarter of 2021 to the first quarter of 2022 or mishandling of a major debtor default would potentially raise the risk of growth dislocation,” analysts at the investment bank said in a note.

(Reporting by Anushka Trivedi in Bengaluru; Editing by Saikat Chatterjee and Alexander Smith)

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