Global Courant
Even the most opaque of financial systems are no match for currency traders.
Chinese leader Xi Jinping’s team and officials at the People’s Bank of China spent the last week obsessing over a yuan exchange rate plumbing 16-year lows.
Xi’s inner circle and PBOC Governor Pan Gongsheng’s currency-management team are warning against speculation in the yuan and opting for higher-than-expected fixing rates.
The main cause of the downward pressures – growing doubts about China’s default-plagued property market – isn’t going away.
In fact, worries are intensifying that Beijing’s efforts to stabilize the market via increased home sales are falling short. That’s adding to the headwinds bearing down on Asia’s biggest economy.
This presents Xi and Premier Li Qiang with quite a conundrum. To date, Xi, Li and Pan sought to put a floor under prices without firing big doses of fresh stimulus into the market.
That’s how China responded in 2008, 2015 and during any number of economic stumbles of recent years. Recently, Beijing signaled that it’s now a bit more willing to stabilize the market.
Yet, as analyst Rosealea Yao at Gavekal Dragonomics points out, it’s clear Xi and Li “have not yet abandoned the aim to reduce the economy’s reliance on property over the long term, meaning some aggressive stimulus options are still off the table.”
The mechanics of this balancing act are playing out in real-time. The next step, Yao reckons, “is likely to be a rollback of other housing purchase restrictions in first-tier cities.” All told, she notes, “recent policy easing is likely to be enough to stabilize property sales at a low level and put transactions on course to decline around 10% this year.”
Conflicting signals abound, of course. Case in point: the PBOC’s move in late August to cut one-year lending rates.
Pan’s team decided not to include the five-year loan prime rate that’s used to price mortgages in its easing move. That, Yao says, “was interpreted as regulators refraining from stimulating property demand, a signal that briefly rattled markets.”
People’s Bank of China Governor Pan Gongsheng has markets dissecting his every move on rates. Image: BBC Screengrab
Days later, though, the PBOC acted with other regulators to unveil multiple policies giving local authorities greater latitude to support property demand. Steps have included major tweaks to policies that previously penalized the purchase of second properties to tamp down speculation.
Even so, cracks continue to appear in a sector that can generate as much as 30% of Chinese gross domestic product (GDP), even in the two weeks since authorities moved to ease mortgage restrictions.
Analyst Zhang Dawei at Centaline Group, for example, reports that existing home sales in Beijing fell 35% last weekend from a week earlier.
Such trends throw cold water on hopes for stabler market conditions in tier-1 cities like Shenzhen to Guangzhou. Analysts at China Index Holdings find that new home sales are down 20% in many areas of the nation.
Economists at Goldman Sachs note that “the measures may generate a short-term rebound in property transactions, but are insufficient to stabilize the property market.”
These trends are, in turn, causing ripple effects around the globe, says Fitch Ratings analyst James McCormack, who views Chinese property as the “most important single sector of the global economy.”
Analyst Vivek Dhar at Commonwealth Bank of Australia adds that “the fate of iron ore prices lies in the hands of China’s property sector.”
Within China, Julian Evans-Pritchard at Capital Economics says the ailing property sector remains the “primary culprit” for the dwindling odds Xi’s economy will achieve this year’s 5% GDP growth target. That’s particularly so with Beijing appearing to prioritize economic retooling over short-term growth sugar highs.
There are many reasons why China is pursuing big-picture reform now, says Japan expert Richard Katz. Like Japan in years past, China, argues the publisher of the Japan Economy Watch newsletter, also “fails to get the most from its immense investments.”
A big factor, Katz says, is the continued dominance of state-owned enterprises. Compared to private companies, SOEs get about only half as much output for every yuan they invest.
“In the 1990s,” Katz says, “Beijing greatly reduced the role of SOEs, but they’ve rebounded under Xi. Worse yet, to prop up economic demand in the face of weak consumer income, China keeps pouring money into infrastructure whether or not it is still needed.”
Varies types of bullet trains cruise into Shanghai Hongqiao Station, one of China’s largest high-speed rail nodes. China already boasts the world’s most extensive high-speed rail network. Photo: Asia Times
Katz says that “while much is marvelous, like the cell phone towers one sees all over rural mountaintops, an increasing share resembles Japan’s famous ‘bridges to nowhere.’ The same goes for all the money poured into new housing, much of it financed with debt, still vacant, and bought by citizens hoping to gain from a price hike – as in Japan’s 1980s property bubble”
The upshot, Katz says, is that “back in 1995, China could increase its GDP by 1% if it hiked its stock of capital by 2%. Now, to get the same 1% expansion of GDP, it has to hike its capital stock by 6%. Consequently, just to maintain the same rate of GDP growth, it has to devote ever-larger shares of annual GDP to investment.”
This, Katz adds, “is unsustainable and is a big factor in why China is in such trouble today.”
Since taking over as premier in March, Li has hinted at a variety of ways to diversify growth engines. One is to create deeper and better-trusted capital markets so that households invest in stocks and bonds in addition to property. Another: build broader social safety nets to encourage household consumption over savings.
Cai Fang, a member of the PBOC’s monetary policy committee, advocates getting more cash to households.
“The most urgent goal now is to stimulate household consumption, and it is necessary to use all reasonable, legally compliant and economic channels to put money in residents’ pockets,” Cai opines. He thinks roughly 4 trillion yuan (US$550 billion) worth of stimulus pumped directly to consumers would boost GDP and end deflation.
The good news is that the transition away from property is afoot, says Greg Hirt, a global investment officer at Allianz Global Investors.
“Overall, we view the property market problems as growing pains in China’s transition from a real estate and export-powered economy to a model more focused on consumption and technology,” Hirt says. “This shift began after the 2008 global financial crisis and has been fueled largely by debt.”
As a result, Hirt notes, China’s national debt level surged towards 300% of GDP. At the same time, local governments and local government financing vehicles – designed to borrow money to fund property and infrastructure development – became heavily indebted and home prices multiplied.
But, Hirt concluded, “we believe the risk of a systemic crisis in the economy remains low in the short term. Measures such as extending debt maturities and bond refinancings have helped support local government finances. The Beijing government has also required developers to deleverage and taken a more cautious approach to approving infrastructure investments.”
Gavekal’s Yao says, “it’s now fairly clear that the government’s bottom lines for property policy have shifted relative to the highly restrictive stance of recent years.”
There are still things the government is unwilling or reluctant to do because it is still committed to the goal of reducing the economy’s reliance on property over the medium and long term.
The current aim of policymakers, Yao notes, is probably to simply stabilize housing sales, which have steadily deteriorated since April and are dragging on economic growth. If transactions continue to weaken, officials are likely to deploy ever-more aggressive steps to put a floor under the market.
“But there is little indication that” policymakers “are considering advancing a national property stimulus, on the model of the slum-redevelopment program launched in 2015, that would deploy public funds directly to expand demand for private housing. That program is these days generally considered to have been a policy mistake, and further subsidizing demand at a time when the fundamental need for new housing is shrinking could exacerbate rather than alleviate market imbalances.”
China’s property woes may or may not threaten systemic risks. Image: Facebook
At present, Yao adds, there are still some existing public programs such as the “urban villages” scheme to renovate decrepit buildings in certain cities, but the scale is quite modest.
“The government,” she adds, “is therefore likely to be willing to remove barriers to households exercising their demand for housing, but unless the slump deepens, stop short of directly boosting that demand. The preference instead is to support more provision of social and public housing.”
A nuanced policy approach of this kind, Yao says, should be enough to ensure that sales in first-tier cities can now bottom out, while sales in some other regions may even post modest gains. “But a strong recovery in total sales still seems unlikely” by design, Yao explains.
Xi and Li clearly seem willing to tolerate a less buoyant property market to avoid the boom-bust cycles of the past – whether global currency traders like it or not.
Follow William Pesek on X, previously known as Twitter, at @WilliamPesek
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