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IMF Sees Covid Opening Bump To China’s GDP, Frets Over Property

Screenshot of coversheet from IMF's World Economic Outlook update, January 2023

THE INTERNATIONAL MONETARY FUND has teased its forecast for China’s growth this year to 5.2%, 0.8 of a percentage point higher than its forecast last October.

The latest update to its World Economic Outlook attributes the upward GDP revision to Beijing ending its zero-Covid policy last November.

For 2024, the Fund expects China’s economic recovery to moderate to 4.5%, unchanged from its October forecast. After that, it expects growth to settle below 4% over the medium term amid declining business dynamism and slow progress on structural reforms.

Overall, the Fund expects global growth to fall from an estimated 3.4% in 2022 to 2.9% in 2023 but then rise to 3.1% in 2024, with central banks’ suppression of inflation and Russia’s war in Ukraine continuing to weigh on economic activity.

What the Fund calls’ severe health outcomes in China’ is one of the downside risks to the global economy it identifies, along with persistent inflation (a risk exacerbated if China’s economy grows faster than expected), an escalation of the war in Ukraine and worsening debt distress.

Amid still-low population immunity levels and insufficient hospital capacity, especially outside the major urban areas, significant health consequences could hamper the recovery.

The IMF says accelerating Covid-19 vaccinations in China would ‘safeguard’ the global recovery.

It again highlights the continuing weakness in property investment in China, warning that a deepening crisis in the real estate market remains ‘a major source of vulnerability’, with risks of widespread defaults by developers and resulting financial sector instability.

Developer restructuring is proceeding slowly, amid the lingering property market crisis. Developers have yet to deliver on a large backlog of presold housing, and downward pressure is building on house prices (so far limited by home price floors).

Reopening the economy should boost consumer and business sentiment and release pent-up demand, which had remained subdued coming out of 2022. At 3.0%, last year was the first time in more than 40 years that China’s economy grew below the global average.

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IMF Cuts China Growth Forecasts, Frets About Property Crisis

Screenshot of cover page of IMF's World Economic Outlook, October 22

The International Monetary Fund has again cut its growth forecasts for China. Its newly published World Economic Outlook expects the economy to grow by 3.2% this year and 4.4% in 2023. 

These are cuts of one-tenth and two-tenths of a percentage point, respectively, from the forecasts it made in July and 1.2 percentage points and seven-tenths of a percentage point from April’s forecasts. 

GDP growth of 3.2% would be the lowest in more than four decades, excluding the initial Covid-19 crisis in 2020. China’s economy grew by 8.1% in 2021 as it recovered from that.

These latest revisions should be seen in the context of a global economy forecast to grow at 3.2% this year, unchanged from July’s forecast, but slowing to 2.7% in 2023, two-tenths of a percentage point less than forecast in July, and down from 6.0 growth in 2021.

The Fund points to two main drags on China’s growth:

  • continuing weakness in the property sector, where it warns that further deterioration could spill over to the domestic banking sector, which would have adverse effects outside the country; and 
  • the anti-Covid lockdowns, which have imposed sizable constraints domestically and gummed up already strained global supply chains. 

The Fund says that pandemic-related forces have been significant in China, with its second-quarter contraction contributing to slower global activity. 

Temporary lockdowns in Shanghai and elsewhere due to COVID-19 outbreaks have weakened local demand, which is reflected in the new-orders component of the purchasing managers’ index. Other data corroborate this picture of slowing economic activity in China. Manufacturing capacity utilization in the country, for example, slowed to less than 76 percent in the second quarter: its lowest level in five years, except during the acute phase of the pandemic. 

Such disruptions not only slow the domestic economy but are felt more broadly. Lower demand in China implies fewer exports for foreign suppliers. At the same time, capacity constraints in production and logistics delay the unclogging of supply chains, keeping global supply pressures—and hence inflation—elevated. 

Pedalling as softly as it can, the Fund calls on Beijing ‘to pave the way’ for a safe exit from the zero-Covid strategy, including by adding to the country’s successful vaccination campaign, especially for the undervaccinated elderly. 

The Fund recites a litany of downside risks to the global economy, from a Covid resurgence to monetary policy divergence. In that last regard, China is already an outlier, with the People’s Bank of China cutting interest rates when other central banks are raising them.

However, the signs of a significant slowdown in the real estate sector, historically an engine of growth for China’s economy, exercise the IMF, which says that the sector’s downside risks dominate the outlook for China’s growth recovery. 

The decline in real estate sales prevents developers from accessing a much-needed source of liquidity to finish ongoing projects, putting pressure on their cash flows and raising the possibility of further debt defaults. Concerned with the delay in the delivery of residential units, thousands of buyers are calling for a moratorium on mortgage payments that would lead to forbearance and exacerbate the risk of nonperforming loans for banks, as well as the liquidity squeeze developers face. Uncertainty about the property sector could also have an impact on consumption and local government finances.

The Fund fears that further intensification of these negative feedback loops between housing sales and developer stress risks a larger and more protracted contraction.

This would be a large blow, given that the real estate sector makes up about one-fifth of GDP in China. Furthermore, the potential for banking sector losses may induce broader macro-financial spillovers that would weigh heavily on China’s medium-term growth.


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China Props Up Housing To Reinforce The Economy

FRIDAY’S CUT IN mortgage rates, the second this year, had been signalled, but its size was a surprise.

The People’s Bank of China lowered the five-year loan prime rate by 15 basis points to 4.45%, the deepest cut since the 2019 revision of its interest rate mechanism, and at least half as much again as private economists expected.

However, the central bank left its one-year reference rate unchanged at 3.70%. This hints that caution over policy easing persists even as authorities seek to boost the beleaguered housing sector to prop up an economy sagging under the weight of the zero-Covid strategy to contain outbreaks of infection.

Housing starts, sales and prices all fell in April. Construction activity fell by 44% year-on-year, following a 20% year-on-year drop in January-March. For the first four months of the year, residential property sales were down by 32.2% year-on-year and commercial property sales by 29.5%.

More than 100 cities have introduced measures in recent months to support first-time buyers while keeping speculative investors at bay. In the short term, the latter group’s return would most rapidly ginger up housing market activity, even if the long-term costs are undesirable.

For now, authorities can hope to do little more than stabilise the property downturn, especially while cities remain in lockdown. Reinflating prices would require broader stimulative measures, undoing several years of stop-go deleveraging of the debt risks in the economy.

Meanwhile, the scope for broader interest cuts is also limited by fears of accelerating the pace of capital outflows as the US Federal Reserve raises its rates.

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Policy Shift Will Favour China’s Tech Platform And Real Estate Firms

THERE IS LITTLE doubt that China’s economic managers are ruffled. The combination of economic headwinds from the war in Ukraine to Covid’s resurgence with its large-scale lockdowns and the uncertainty over the global economy caused by inflation, supply chain chaos and tightening monetary policy are as disruptive as they were unanticipated.

The readout from Friday’s Politburo meeting was a clear recognition that the leadership understands the straitened state of the economy. Thus it is switching the balance of policy priorities from regulation and structural change back to growth.

Evidence of that can be seen in the Politburo’s signalling of an end of the campaign to ‘rectify’ the platform tech companies that started in late 2020, and its declaration that there needs to be liquidity support for beleaguered property development firms.

The English-language version of the readout put less emphasis on continuing regulation of the tech sector than the Chinese version, which, similarly, was clearer that controls on real estate speculation would continue. 

If that was an attempt to send different messages to domestic and international audiences, it strikes this Bystander as cack-handed.

Many international investors have recently turned bearish about China and moved capital out, believing the economy is in worse shape than even the official figures suggest, exacerbated by adherence to the zero-Covid policy.

However, they will judge the concrete support for the ‘healthy’ development of the platform tech and real estate sectors on its merits rather than its promise. That support will come sooner rather than later.

The government wants both sectors to thrive, especially now, but in a way that serves central policy objectives more directly than before. 

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World Bank Trims China Growth Forecast, Frets About Real Estate

World Bank estimates and forecasts of China's economic growth

THE WORLD BANK has trimmed half a percentage point off its estimate for China’s GDP growth last year and three-tenths of a percentage point off its forecast for this year and remains concerned about the risk of a prolonged downturn in the property market.

In the latest edition of its Global Economic Prospects, the Bank estimates China’s economy grew by 8.0% last year, down from the 8.5% forecast in June 2021. It forecasts 5.1% for 2022, down 5.4%, reflecting the lingering effects of the pandemic and additional regulatory tightening. It is holding its 2023 forecast unchanged at 5.2%.

Its forecast for this year is in line with China’s slowing trend growth.

In its commentary, the Bank says that manufacturing activity has been solid despite supply disruptions and electricity shortages, and export growth has accelerated, even as Covid-induced lockdowns and curbs on the property and financial sectors have restrained consumer spending and residential investment.

For now, macroeconomic policy measures have forestalled a sharper economic slowdown and mitigated financial stress. The People’s Bank of China has reduced reserve requirements, lowered its one-year loan prime rate and implemented significant short-term liquidity injections. The government has accelerated infrastructure investment, supported homeowners and creditworthy developers, and accelerated local government bond issuance.

However, looking ahead into this year, the Bank expects the effects of the pandemic and tighter sector-specific regulations to linger, with policy support only partly offsetting that. It also remains concerned about the possibility of a marked and prolonged downturn in the property sector—and its potential effects on house prices, consumer spending, and local government financing. It describes this as ‘a notable downside risk’ to its forecasts.

In China, financial stress could trigger a disorderly deleveraging of the property sector. Property developers such as China Evergrande have collectively accumulated financial liabilities approaching 30 percent of GDP. Moreover, corporate bonds issued by property developers accounting for a third of the sector’s liabilities have recently been trading at distressed prices. A turbulent deleveraging episode could cause a prolonged downturn in the real estate sector, with significant economy-wide spillovers through lower house prices, reduced household wealth, and plummeting local government revenues. The banking sector—local banks in particular—would be significantly impaired, raising borrowing costs for corporations and households.

Should that come about, the impact would be felt well beyond China. The financial stress would quickly reverberate across the region’s emerging markets and developing economies. The knock-on effect would be the risk of capital inflows suddenly drying up, triggering currency crises, especially in any country dependent on short-term inflows to finance its current account deficit.


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China’s Property Tax Edges Closer But Is Still Distant

IT HAS BEEN a decade since a property tax was piloted in Shanghai and Chongqing. However, on October 23, the National People’s Congress announced that these pilots would be extended to other cities in a five-year test, although details have not been made public.

The decade-long gap is indicative of how much resistance there has been to bringing in a property tax nationally in the meanwhile.

Unaffordable home prices are a significant grievance among the urban middle class, especially for younger members struggling to get on the property ladder. Yet, it is also the primary means of accumulating wealth, particularly for the subset of the middle class who are officials. According to the rating agency Moody’s, property accounts for about 70% to 80% of household wealth in China.

The current five-year plan (2021-25) promises the introduction of a property tax within its term. However, when President Xi Jinping called for a property tax earlier this month, albeit couched in terms of curbing property speculation and limiting excessively high incomes under his ‘common prosperity’ rubric, there was scepticism about whether this latest attempt to introduce it more widely would be any more successful than previous efforts.

A property tax would be instrumental in reforming China’s fiscal model in a way that would support more balanced development and reduce local authorities dependence on land sales to raise revenue — and the associated opportunities for pocket lining by local officials. More than 20% of provincial and municipal government revenue comes from land sales to developers, totalling some $1.3 trillion last year.

A property tax would have to replace that and more. The limited schemes being tested in Shanghai and Chongqing accounted for an estimated 5% of local tax revenue at most last year. Sticking our fiscal finger in the air, we reckon that a national property tax, like property taxes in most countries, would have to extend far beyond the superwealthy to raise the revenue that would be needed.

The political obstacles to a property tax remain high, although arguably the least high of any point in the past decade. For many, officials in particular, it will not be so much the taxes to be handed over to the central government as the disclosures of properties for tax assessment.

There is also the significant risk that, if mismanaged, it would exacerbate the slowdown in the property market triggered by the Evergrande crisis.

There is some headroom for growth to slow and still meet official targets of around 6% growth. Yet, a prolonged or significant slowing of the economy beyond that could cause politically troubling social instability.

The expanded trials of property tax will likely start small and be implemented gradually. Wealthy Zhejiang province has been floated as a possible candidate. Other reports speak of up to 10 cities being selected. First-tier and core second-tier cities would be the most likely to be chosen. What the tax rate would be, what it would be applied to and when it would start has still probably to be argued out. Similarly, what, and more importantly, who gets an exemption or preferential rate.

If Xi throws his weight behind pushing through a property tax, it will be a litmus test of how powerful he is. However, as he has given himself five years for the expanded pilots, we may well know the answer to that by other means by then.

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Building A Solution In Hong Kong

Tai Yuen Estate in Tai Po, Hong Kong, June 2015. Photo credit: Exploringlife - Own work, CC BY-SA 4.0, https://commons.wikimedia.org/w/index.php?curid=41005351AT THE HEART of the political standoff in Hong Kong lies the fact that the protesters will not end their demonstrations without concessions from the government while the government will not entertain concessions without an end to the demonstrations.

As the violence on the streets has escalated, both positions have hardened. Hence the possible significance of Chief Executive Carrie Lam’s references in her disrupted speech to open the new session of the Legislative Council about building more housing in the city and making it more affordable.

To this Bystander’s ear, that sounded like an attempt to shift the underlying cause of the demonstrations from the political to the social and lay some sort of foundation for a dialogue.

Affordable housing was a concern before the protests started. Measures to tackle the high cost of housing now being advanced such as a vacancy tax were being discussed previously. However, beneath the strident line taken by state media on the mainland that Hong Kong is a purely internal matter for China that will brook no foreign interference, the argument that housing is a root cause of the protest is being advanced.

Whether that will cut any ice with the demonstrators, especially the most hard-line who want political reform including universal suffrage, is a different matter. But even for moderates, it may at this point be too little, too late.

Lam has hinted at a future willingness to consider constitutional revisions, although reportedly she told EU officials privately that even discussing extending the voting franchise was not ‘feasible’ now. Getting the approval of Beijing for any political concessions to the demonstrators would look to be a more difficult task than lowering Hong Kong’s sky-high property prices.

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China’s Debt Trifecta: Property Loans, Muni Debt and Shadow Banking

REAL ESTATE AND shadow banking has driven a quadrupling of China’s debt since 2007, the year when the bursting of a global credit bubble brought the world’s financial system to its knees. Since then China’s total debt has risen to $28 trillion (as of mid-2014) from $7 trillion. As a share of GDP, it is now 282% — larger than the comparable figure for developed economies like the U.S., Canada, Australia and Germany.

One would expect China’s total debt to have increased as its economy grew. Though slowing it has still been growing at more than 7% a year since 2007 let us not forget. But the increase in the country’s debt-to-GDP ratio, from 158% in 2007, shows the country has been piling up debt far faster than its GDP growth rate alone would suggest.

Even that relatively high level of debt is still manageable, in the sense that “China’s government has the capacity to bail out the financial sector should a property-related debt crisis develop,” the McKinsey Global Institute (MGI) says in a new report on global debt and deleveraging. The report covers well-trodden ground, but it still provides a sobering reminder. Seven years of the world’s great and good espousing the virtues of austerity have resulted in a $57 trillion increase in global debt outstanding.

China has accounted for one-third of that growth, and, this Bystander notes, is bucking the trend of the debt burden moving from the private to the public sector, where is relatively less systemically risky. Non-financial corporations have been the bigger driver of this increase in China’s debt; the country now has one of the highest levels of corporate debt, at 125% of GDP (U.S. 67%; Germany 54%, by way of comparison).

MGI is relatively sanguine about the big-picture consequences, but it still sees three potentially worrisome developments, all of which will be familiar to regular readers here:

  • half of all loans (excluding financial-sector debt) are linked, directly or indirectly, to China’s cooling but still inflated real-estate market;
  • unregulated shadow banking accounts for nearly one-half of new lending and one-third of outstanding debt; and
  • the debt of many local governments is probably unsustainable; with the $1.7 trillion in outstanding loans to local governments’ off-balance-sheet special financing vehicles the particular worry.

History teaches us — repeatedly — that financial crises often follow rapid debt growth. The most plausible route to that happening in China is that overextended property market meets local government debt bomb. A wave of loan defaults is set off, particularly among the country’s many small property developers (who number into the high tens of thousands). That then ripples through the construction industry, and the city commercial banks and other small lenders that finance developers and building firms.

A government bailout would limit the damage, as it did when Beijing bailed out the big state-owned banks more than a decade ago. But the economy would likely slow dramatically with consequential social unrest and other political implications that the Party just won’t entertain. “The question today,” MGI says, “is whether China will avoid this path and reduce credit growth in time, without unduly harming economic growth.”

MGI’s prescription is conventional: more of what Beijing is already doing, but with greater urgency. That means:

  • reforming municipal finance (allowing local taxation to be raised, deepening the nascent muni-bond market);
  • improving transparency and risk management among lenders (including corporations that are making loans through the shadow banking system);
  • more robust data on real estate markets;
  • improved bankruptcy procedures; and
  • new retail savings and investment products from mainstream financial institutions that can be an alternative to those offered by real estate developers and informal lenders in the shadows and on the curb.

Will all those things happen? Eventually. Such reforms have the backing of the top leadership because the risks of not implementing them are greater than those of doing so — and the latter set are considerable to a Party trying to pull off the unprecedented feat of retaining a monopoly on political power while ceding its monopoly on economic power.

However, it is widely if, not universally accepted that present arrangements are unsustainable. Unwinding them requires time. First, to deal with vested interests that will lose out. China’s are uncommonly thorny because they mostly get their economic interests because they are politically powerful (elite families), rather than drawing their political clout from their economic success.

Second, to phase in the changes so that the cure is not worse than the disease. Just as China has learned from Japan about the importance of managing its currency, so it has learned from Russia the need to avoid a rapid grafting of free-market capitalism onto a socialist economy.

The question is not, does China have too much debt. The question is can the Party buy itself enough time to create the conditions in which the country’s debt is sustainable?

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Chinese Buy Up Manhattan Apartments

THIS BYSTANDER IS not surprised to read a Reuters report saying that when it comes to buying apartments in Manhattan Chinese buyers are outspending all other foreign buyers for the first time. The news agency polled leading estate agents in the city who were unanimous in their view, though divided as to whether Russians, other Europeans or South Americans were the new number 2.

Chinese buyers have been pouring money into U.S. property ever since the housing market collapsed in 2008. Even though prices fell less in New York City than elsewhere in the country, and the price for luxury apartments hit a record in the first quarter, the city still appears a bargain compared to China’s big cities and other favored havens for wealthy Chinese such as Hong Kong and Singapore. In London, where Chinese have been the leading foreign buyers since last year, luxury apartments are selling for twice the price per square foot of New York’s.

One broker says Chinese buyers in New York City typically buy in the $1million-$5 million range, but will often buy two or three properties at a time. This has driven a boom in new construction in New York. There is an estimated 2 years supply of unsold luxury apartments and more coming on the market, which leads some to wonder if the rate of price rises may tail off.

Really well heeled Chinese, Reuters says, are flocking to One57, a luxury skyscraper on Central Park designed by Pritzker Prize-winning French architect Christian de Portzamparc. A three bedroomed apartment there starts at $19 million; a whole floor could cost $55 million.

As well as providing a bolt hole for their cash, Chinese buyers have been particularly attracted to cities where there a leading universities. Most wealthy Chinese want their children to attend an overseas college, surveys have found. New York is well situated with Columbia and New York University both having large campuses in Manhattan.

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China’s Regulators Show Their Nervousness About Real Estate Defaults

ALLOWING TWO REAL estate development firms to raise capital through private share placements hints at stress the property sector is putting on China’s shadow banking system. Tianjin Tianbao Infrastructure and Join.In Holding will be the first such firms that regulators are allowing to raise funds this way since authorities started to let the air out of the property bubble in early 2010.

Nor are the pair likely to be the last. Fears are growing of further property defaults among cash-strapped developers following the near-collapse of a small, privately owned developer, Zhejiang Xingrun Real Estate, earlier this week. Officials stepped in after the company was unable to meet payments on 3.5 billon yuan of debt, two thirds of it owed to banks. Earlier this month, China saw its first domestic bond default since the the corporate bond market was opened up in 1997.

The Shanghai Securities News reports that since the middle of last year more than 30 listed property firms have sought permission to raise a total of 90 billion yuan ($14.5 billion) of new captial. Many developers facing tight credit conditions, a slowing economy, and overbuilding in smaller cities have reportedly turned to the shadow banking system, but the high rates they are paying to borrow there only double down on the risk of defaults.

Earlier this week, the central bank and China Construction Bank were reportedly discussing the bailout of a developer owing 3.5 billion yuan — believed to be Zhejiang Xingrun — that had borrowed informally at rates of 18-36%. Zhejiang Xingrun is based in Ningbo, one of the cities where government data released earlier this week showed home prices falling. Another is Wenzhou, a shadow banking centre. Two of Zhejiang Xingrun’s owners have been detained by police for what is being described as illegal fundraising.

Separately, the central government’s 2014-20 urbanisation plan released earlier this week calls for a national property database to be set up. This would be a precursor to a new property tax to fund the urbanization plan and to allow local government finance to be reformed. However, it will likely face local footdragging from the many officials who have squirreled away ill-gotten wealth in the form of real estate — even if some of that real estate is starting to look less valuable.


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