China had an eventful 2022. The two notable events were the end of the zero-tolerance Covid policy, and the 20th National Congress of the Chinese Communist Party. The latter was seismic. The pivot away from the zero-tolerance policy for Covid -19 is a welcome development, while the developments from the national congress give us an insight on what to expect in terms of long-term growth prospects, well beyond 2023.
China officially announced the end of its zero-tolerance Covid policy on the 07th December 2022. Since then, quarantine and local lockdown measures have been rolled back. Domestic and international borders have been gradually reopened. The unexpected end to the zero-tolerance Covid policy triggered a large-scale outbreak of Omicron variants across cities and urban areas. Those infection rate have peaked in large cities. Lower-tier cities and the rural area will likely experience peak infection with a slight delay. This will drag out the recovery. Because the equity market priced ahead, the MSCI China index has rebounded strongly by 30%+ from the low in October to year-end. The index still closed 20% lower for 2022 as a whole.
Pent-up demand is expected to drive domestic consumption recovery in 2023. This will offset much of the slowdown in export manufacturing activity caused by weaker developed markets demand. Beijing has signalled relaxation on other policy fronts to spur growth. These include regulations on internet platform companies and the property market. The government has announced a new credit policy to promote housing sales. Banks are now allowed to lower mortgage rates for first time home buyers in cities where home prices have dropped for at least three consecutive months. State media has reported the government may roll back or delay the deadline of the “three red lines” policy, designed to discourage property developer’s leverage. This is cosmetic. The central government is obviously trying to address the key issue in the current economy down cycle, lack of credit demand, as opposed to lack of credit supply. This is holding back economic momentum.
The fiscal and monetary policy will remain supportive, at least, for the first half of 2023. Liu Kun, the current Minister of Finance, has stated the Ministry will step up proactive fiscal policy this year by expanding fiscal expenditure, promoting special bond investment, and more transfer payments from the central to local governments. This is necessary to stave off municipal bankruptcies in 2nd tier cities. The People’s Bank of China has reiterated their intention to use various monetary policy tools to maintain reasonably ample liquidity in 2023. The central bank will take greater measures to lower financing costs. This has raised market expectations on more interest rate and required reserve ratio cuts. The 1-year loan prime rate and required reserve ratio are at 3.65% and 11.0% respectively, at the moment.
The medium-to-long term view of the Chinese economy is more balanced, erring on the side of caution. The 20th Party Congress was, on the surface, a venue to announce the appointment of the seven top leaders to the Politburo Standing Committee. Specific economic and social policies will only be announced in the subsequent National People’s Congress, which convened on the 05th March 2023. Under the new Politburo leadership, it is expected that several major themes set during the 14th Five Year Plan, 2021-25, will likely continue their course longer. The two major themes to focus on are “Common Prosperity” and “China Modernisation”. National security and social stability, including supply chain security, are paramount, following the 20th Party Congress.
Another overarching is “Housing is for living, not for speculation”. This summarises the government’s approach to reshape the property market. High property prices incentivise households to save more to meet the cost of accommodation. They prevent young adults and migrants from buying homes. This conflicts with Beijing’s strategic objective of transitioning to a consumption-led, less unequal economy, the “Common Prosperity”. Policymakers have been aggressively trying to alter expectations and revert the financialisation of property. This is defined as buying one or more properties purely for capital increase instead of rental income generation. This was a common practice in China, and a major driver of higher property prices. The speed in which these policies were rolled out in 2021, and the restrictive nature of zero-covid policy, pushed the economy into severe downturn in 2022. This was preferable to long-term social instability which would threaten the Party’s grip on power. There is a financing issue local government. This is one part of the wider problem of Chinese leverage, and potential for cascading corporate debt. Recent easing back on some of these measures are meant to arrest the ongoing downturn in the property market, amid the still subdued housing demand.
Deleveraging of housing market will resume once market sentiment is stabilised. The current situation is unsustainable. State-owned enterprise developers are the likely agents of change. The government is likely to replicate, to an extent, the structure of more advanced economies such as Singapore. Priority is likely to be given to improving housing quality and affordability, establishing a proper rental market, and further disincentives to the financialisation of property. Once the market stabilises, the property tax is expected to rise.
China’s long-term growth is expected to trend lower because of their
aging population. The intent to reducing
dependence on real estate is meant to allow a more efficient allocation of
resources, elevate consumption as the main engine of growth, and transitioning
to higher value-added industries and renewable energies. This should help boost total factor
productivity, and support GDP growth in the long run. To fund this, it is expected that state capital
involvement will increase in key strategic industries. In summary, we can expect growth, but the
economy will slow down in the long term due to the ageing population and
maturing economy. The financial markets
will mature and become deeper as more sophisticated financial engineering is employed.
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