BEIJING — The last three months of the year are set to bring more clarity on China’s economic outlook and any government support — especially for the critical real estate sector.
China’s rebound this year from Covid-19 has slowed since April. Then over the summer, the property slump accelerated, despite many large cities easing restrictions for buying apartments.
“Gradually, the central government is going to loosen up on the supply side, too,” Yao Yang, dean of the National School of Development at Peking University, told reporters in a briefing Wednesday.
“Probably in half a year, we are going to see the housing market stabilize,” he said, noting regulators were previously “overshooting” in their real estate crackdown.
At its peak, China’s property sector accounted for about a quarter of the economy, which means the industry’s struggles have weighed on everything from consumption to local government finances.
Yao also expects the central government to allow local governments to borrow more money to pay back their long-term debt — which he said can help the economy recover fully by the middle of next year.
In 2020, Beijing tried to rein in real estate developers’ high reliance on debt with new restrictions on financing. Covid restrictions dampened homebuyer appetite, drying up an important source of cash for developers since apartments are typically sold ahead of completion in China.
Developers delayed construction on projects, further worrying homebuyers. By late 2022, several real estate giants had defaulted on their debt. This summer, top leadership started to signal a new tone.
“The decline in the real estate sector was the result of the government’s intentional measures to correct the bubbles in the market,” Yao said. He noted that floor space sold this year will likely be more than 500 million square meters less than what it was before the crackdown — and 200 million square meters less than what’s considered acceptable for the industry.
But he and other economists mostly don’t expect real estate to return to significant growth in the future.
Dan Wang, Shanghai-based chief economist at Hang Seng China, said she expects housing market weakness will persist and prices to fall in the coming years, but not abruptly.
Her analysis found an unofficial minimum price for sales of newly built homes across China. “Some developers would say they sort of know the baseline, they cannot give a discount of 15%,” she said.
“For [the] Chinese government, they would like to see more of a controlled decline rather than a sudden adjustment,” she said, noting significant social consequences if house prices plunge, since much of household wealth is stored in housing.
The combination of these measures could allow the economy to rebound modestly from 4Q23 onward.
This week, worries about China’s real estate sector persisted with highly indebted Evergrande running into more liquidity problems — along with reports Wednesday its chairman has been put under surveillance.
“A breakthrough on Evergrande’s restructuring, yeah it’s going to make a difference,” Clifford Lau, portfolio manager at William Blair, said in a phone interview Monday.
“But is it going to re-price the entire bond sector to high single-digit[s], to 20 cents to a dollar? I think that is a very long journey.”
Gloomy sentiment
Such headlines have weighed on sentiment, both domestically and among international investors. Some longtime China watchers, especially outside the country, have said they are confused about Beijing’s economic policies. Foreign businesses have grown pessimistic.
“When we talk about confidence, most of businesses live in today. They want to get by today. No one cares about 10 years after,” said Yao, who is also director of the China Center for Economic Research.
“So the lack of confidence is the same thing as slowing down of the Chinese economy. If the economy is slowing down, no one is going to have an optimistic view about the economy [any]where,” he said.
Yao has been a long and early proponent of handing out cash to some people in China to boost consumption. While some cities have done so, central government authorities have been hesitant, preferring to cut taxes, especially for businesses.
Policy meetings ahead
Lack of formal communication is not helping sentiment.
China’s tightly controlled system means that policy changes can typically only occur after major meetings of top leadership known as the Politburo. Those generally occur in late April and late July, and another meeting in December to discuss the year ahead.
In the coming weeks, China’s ruling Communist Party is due to hold its Third Plenum, a meeting held once every five years which typically focuses on longer term aspects of the economy.
“A central-government-led, comprehensive plan to resolve local debt risk may be unveiled before/at the Third Plenum this fall. The combination of these measures could allow the economy to rebound modestly from 4Q23 onward,” Robin Xing, chief China economist at Morgan Stanley, and a team said in a note.
Also widely anticipated is the National Financial Work Conference, a meeting to discuss financial development and risks. It has been delayed since it was originally expected to be held last year.
The meetings are part of a structure China has had for years. What’s different is that more recently, policymakers have become less likely to make major announcements before high-level directives are clear.
The Communist Party of China is also gaining increased oversight of finance and tech with the establishment of new commissions — a reorganization process announced in March and expected to take effect by the end of the year.
Is organic growth enough?
It’s not clear how much more policymakers need to do for the economy, especially since there’s still modest growth.
In the long term, Yao expects China’s GDP has the potential to grow by 5.5% a year, supported by a high savings rate and the country’s leadership in new energy vehicles, renewables and advanced technology.
This month, weekly data from Nomura indicate the real estate sales slump has moderated. Retail sales also grew better-than-expected in August and industrial profits for the month surged by 17.2% from a year ago.
Bruce Pang, chief economist and head of research for Greater China at JLL, pointed out that industrial profits rose regardless of company type.
What’s needed is “policy stability, not policy overshoot,” he said in Mandarin, according to a CNBC translation.
Pang doesn’t expect major policy changes at meetings later this year, but anticipates the central bank will continue to lower interest rates and growth to pick up naturally.
Even with a number of lowered China growth forecasts this year, economists’ expectations are close to, or slightly lower than, the official target of around 5%. Nomura on Wednesday increased its full-year GDP forecast to 4.8% from 4.6%.
“I guess every couple of years, you hear these stories about something. Trust companies, shadow banking was supposed to take the country down back in 2013. Didn’t happen,” said Peter Alexander, founder of Shanghai-based consulting firm Z-Ben. He said he arrived in China in 1996, at around the Asian financial crisis.
“Somehow, someway,” he said, “policy has entered to be able to provide some form of corrective action that has stabilized, or at a minimum, postponed the supposed inevitable.”
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