Be grateful for small mercies. Last week, Citigroup’s Economic Surprise Index – a gauge that measures how often economic data comes in above or below expectations – swung back into positive territory for China for the first time since early June.
This is not surprising given that data for the third quarter published last week was stronger than anticipated. Gross domestic product grew at an annualised rate of 4.9 per cent, above the median estimate of 4.5 per cent. Retail sales increased at a faster pace than expected, while data on industrial output and the unemployment rate also beat expectations.
Investment banks are hurriedly upgrading their forecasts for full-year growth – which is now much more likely to exceed the government’s 5 per cent target – and calling the bottom of the downturn. Nomura, which is notoriously bearish on China, said the economy “has recently been showing signs of stabilisation”.
JPMorgan noted that “for the first time since April, China’s growth returned to [an] above-trend path and the momentum continued into the current quarter”. More interestingly, it said “bazooka-like policy stimulus” – the response most investors have been clamouring for – was “unlikely and undesirable”. Instead, it was important to “maintain the momentum of policy support”.
The pace of easing has certainly picked up in recent months. Beijing has introduced a string of measures to counter the downturn in the stricken property sector. China’s largest cities have reduced minimum down payments for homebuyers, banks have been instructed to lower rates on existing mortgages and local governments have scrapped a requirement disqualifying people who previously had a mortgage – even if it has been repaid in full – from being treated as first-time buyers in big cities.
02:39
China’s economy sees a resurgence in the third quarter, beating forecasts
China’s economy sees a resurgence in the third quarter, beating forecasts
Yet, a cursory glance at last quarter’s data shows the scale and severity of the crisis in the real estate market. The value of output in the industry shrank 2.7 per cent, the eighth quarterly contraction in the past nine quarters. Property investment, meanwhile, fell by 9.1 per cent in the first nine months of 2023.
In September, prices declined at their fastest pace in almost a year, new home sales contracted 10.1 per cent in annualised terms while funding for property development shrank 18 per cent, according to Nomura.
Country Garden, once China’s largest developer by sales, missed an interest payment last week on one of its US dollar-denominated bonds, adding to acute funding pressures on developers. According to JPMorgan, 40 to 45 per cent of the top 100 developers have defaulted on publicly traded debt since the liquidity crunch erupted in the second half of 2021.
To expect any kind of meaningful recovery when the real estate sector – which is the most important source of household wealth – is collapsing is preposterous. If any recovery is taking shape, it is an L-shaped one: stabilisation around a nadir with no prospect of a return to earlier rates of growth.
10:57
Boom, bust and borrow: Has China’s housing market tanked?
Boom, bust and borrow: Has China’s housing market tanked?
In a report published on October 15, S&P Global Ratings said that “the good news for China’s property developers is that a bottom is in sight. The bad news is that the sector will likely bump along this floor for years.” This is the predicament facing the economy as a whole, at least until such time as new growth drivers begin to offset the huge drag from the downturn in property and related industries.
The downturn is not just structural, it is also policy-driven. Having turbocharged debt-fuelled investment between 2000 and 2012 – a large portion of it going into unproductive real estate, leading to excessive leverage, unsustainable prices and excess capacity – Beijing had little choice but to allow investment to fall back towards more reasonable levels in an effort to reduce financial risks and increase the share of private consumption in economic output.
This rebalancing, however, has been costly, both in terms of economic activity and asset prices. JPMorgan estimates that every 5 per cent change in real estate investment affects overall growth by 0.6 to 0.7 percentage points if indirect effects are included.
Moreover, despite the succession of easing measures in the housing market, the CSI 300 index of Shanghai and Shenzen-listed stocks has erased all its gains since the reopening rally began in early November 2022.
What medicine does China’s economy need as property hangover haunts outlook?
While it is unclear how aggressively the government will loosen policy in the property sector and when the ailing industry will stabilise, a real-estate-induced downshift in China’s long-term growth rate is already under way. S&P Global Ratings believes property sales will revert to the “stable” period in the years following the 2008 global financial crisis, connecting sellers with real buyers.
The International Monetary Fund is more alarmist. In its latest survey of China’s economy, published in February, it warned that in the absence of reforms to raise productivity and counteract a declining labour force, the diminishing returns of investment-led growth would cause annual output to drop below 4 per cent by 2026.
China’s economy is finally beating expectations, but the fact that expectations were low to begin with and could fall further in the months ahead offer little reason for cheer.
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