Insights on China's new policies, reform initiatives and economic data brought to you from Lead Analyst Jens Presthus
22 April 2022
Fiscal support to secure 5.5% growth, but real estate held back by weak demand
2022 has been a challenging year for Beijing. Even more so than policymakers expected when they presented their gloomy economic outlook during the Central Economic Work Conference in December 2021. Nevertheless, because GDP growth in China is set by policymakers in Beijing, rather than being a product of activity in the underlying economy – as it is in most other economies – it is likely too soon to lower GDP growth estimates for 2022. President Xi Jinping, who pointed to the strength of the Chinese economy during his speech at the BOAO Forum on April 21st, will likely not tolerate any embarrassments in the year when he starts his third term in office.
Grand plans for infrastructure and manufacturing investment in Chinese provinces
Value of planned investment in 2022, RMB trn
Sources: Bloomberg
Key takeaways
Beijing seems intent on meeting its 5.5% GDP growth target despite severe covid-19 outbreaks. This will result in substantial government spending and a jump in debt levels.
The PBoC has limited space to support the struggling economy. Capital outflows is a growing concern and weak demand makes its policies less effective.
Price data shows that the property market may have turned a corner. But weak sales volumes and sceptical homebuyers mean it is too soon to call a bottom.
Fiscal over monetary, supply over demand
Fiscal policy to drive growth but promises of demand-side support have failed to materialise. To ensure that the 5.5% GDP growth target is met, local governments have already used most of their special purpose bond quota – which at 3.65 trn RMB is almost at the same level as in 2020. It is therefore likely that the quota will be depleted by end of Q2, and that additional borrowing will be approved for H2. After all, local governments have announced infrastructure and manufacturing projects worth at least $2.3 trn for 2022 - $1.2 trn more than the multi-year US’ infrastructure bill. The focus on building the economy out of trouble has also meant that demand-side support again has been side-lined. Indeed, when the State Council on April 13th announced several measures to support households, it did so by promoting ways to make it easier for people to consume – rather than by increasing disposable income or the household share of GDP. Beijing is again counting on the supply side to deliver growth and jobs in the short term – even though China’s many small businesses complain it is increased demand that is needed, not supply.
The PBoC is constrained by risks to financial stability and limited impact of monetary policy in China’s low-demand economy. Despite widespread market belief that the central bank would ease policy – fuelled in part by Premier Li Keqiang and Vice-Premier Liu He promising support on multiple occasions – it has done little of it. Small cuts to the reserve requirement ratio and encouraging banks to lend more are not going to revive the economy. This is because the PBoC knows it is facing risks to financial stability from capital outflows as the relative attractiveness of Chinese government bonds declines. Indeed, even without lowering interest rates, capital is flowing out of the country at an accelerating pace. The PBoC is also aware of the marginal effect monetary policy easing will have on the real economy when China’s main problem is weak demand, not limited supply. Moreover, as the PBoC’s Q1 consumer confidence survey showed, an increasing number of households are now turning pessimistic about future income prospects. This, combined with private debt levels that are higher than in most developed economies, is prompting households to save more, borrow less and hold back on consumption.
Weak demand and high debt levels dampen impact of monetary policy
Household debt to income ratio, %
Source: NBS, OECD
False dawn or turning a corner on real estate?
Property price data has gradually been improving, but sales volumes remain low. By some metrics, the property market looks to have turned a corner. The number of cities that are seeing property prices go down is decreasing, in similar fashion to how the market recovered from the 2012 and 2014 downturns. Industry participants on the ground in China also point to improvements in month-on-month pricing data. However, this data can be misleading. Local governments are enforcing price floors to stop a downward spiral while developers are handing out cars and furniture when selling homes – all to avoid lowering prices. Indeed, sales volumes tell a different story. Even in tier-one cities like Shanghai and Shenzhen, the number of units sold has not seen the same stabilisation as prices. Compared to the 2014/15 housing recovery, today’s rebound in units sold is not only of more limited scale, but it is also fading faster.
Turning a corner in the housing market?
Month-on-month price change in newbuilds, number of cities
Source: NBS
Daily housing units sold, 30-day moving average
Source: Local housing agencies
Policy support has increased, but demand may not follow supply. In contrast to the 2014/15 downturn, when policymakers said they only wanted to “cool” the market, the central government this time declared that the party is over for property speculators. While there are signs of backtracking at both the local and central level, with local officials encouraging home purchases for investment purposes and Beijing halting the implementation of a property tax, policymakers do not appear to have convinced home buyers that prices only can go up. Real estate loans have been slower to pick up compared to 2014/15, while the PBoC’s Q1 consumer confidence survey showed that only 16% of respondents believe home prices will increase – down from 36% in mid-2018.
Sentiment remains poor among home buyers Expectations of house price increases, % of respondents
Source: PBoC
In the same way, as high debt-levels are holding back consumption, an increasing number of households are now more focused on meeting mortgage and private credit loan payments than investing in their next property. For policymakers in Beijing, who have been forced to respond more aggressively compared to 2014/15 because of the jump in household debt, this is the main concern. If buyers do not return to the market and local officials no longer are able to control downward price moves, then we may witness forced sales and risks to financial stability that the head of the banking regulator, Guo Shuqing, warned about in March.
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