Chinese authorities face an ever-growing list of challenges — be it an
ongoing trade fight with the U.S. or headwinds in domestic demand — and it
appears they don’t have many tools left to spur the economy amid a slowdown.
The real estate market in China
has traditionally played a major role in it’s economic development, household
wealth and public sentiment and was used by Beijing to stimulate growth during
previous downturns, including one just three years ago.
But along with a Chinese penchant for investing in houses, persistent
expectations of government support sent prices and the household debt burden
soaring.
That’s created a delicate situation, one which analysts expect Beijing
will not touch this time around, except to keep prices steady.
Junheng Li,
founder of China-focused equity research firm JL Warren Capital, estimates 61
percent of Chinese urban households live in homes less than 10 years old. She
also notes there are many older units that are still in good condition.
”(Some)
simple math shows that continuously building new homes to stimulate investments
and meanwhile create the false impression of wealth effect coming with home
price appreciation is about to hit the wall,” she said in a January report.
“Chinese policy makers are fully aware and highly alert not to send the wrong
signal to the home buyers that home prices will continue to hike.”
High housing
debt
As Beijing
tries to shift its economy to one that’s driven by consumption, the worry is
that consumers will not have the means, or the enthusiasm, to spend. Already, retail sales growth has slowed significantly amid uncertainty about U.S.-China trade tensions and the impact on economic
growth.
Economists
at Moody’s Analytics pointed out in December that Chinese disposable income has
grown at an average annual rate of 10 percent for the last six years, while
household debt — of which the majority is tied to housing — has grown at an
average rate of 20 percent a year. In the past year, the average rate of
household debt growth climbed to 26 percent, the report said.
It’s
unlikely that the housing market will lead China out of the latest economic
slump. In the last few years, government intervention has cooled the market,
and real estate’s contribution to growth has fallen slightly to about a third
or a quarter, according to Dan Wang, analyst at the Economist Intelligence
Unit.
In fact,
several China watchers have said the property market poses the greatest risks
for China in the year ahead.
On Tuesday,
Lynda Zhou, Fidelity International’s chief investment officer of equities in
China, said an unexpected sharp drop in housing prices would be a “black swan”
event. A black swan event is an unforeseen occurrence that usually has dire
consequences, which Chinese President Xi
Jinping warned of earlier this week when he
was talking about challenges to China’s economy.
Infrastructure
spending is key
China’s
rapid ascent to becoming the world’s second largest economy has brought with it
a slew of problems that are both unique and complex.
The
Communist Party-controlled government has so far managed to keep a handle on
growth. But it’s an ongoing challenge that faces repeated tests. To prevent a
sharp economic slowdown this time, analysts said Beijing has only one primary
option for spending: infrastructure.
“This round
of economic decline is due, to a large degree, to a downturn in individual and
private sector confidence,” Qian Wang, managing director and chief economist,
Asia-Pacific, at Vanguard Investment Strategy Group, said in Mandarin during a
press event in Shanghai earlier this month. “In this situation, we are
concerned that stimulative economic policy may be slowly losing its
effectiveness, and may not work as quickly.”
Wang expects
the government’s announcements on tax and fee cuts
to have a positive effect in the long term, but in the short term, authorities
will need to stimulate through infrastructure spending.
Here, the
Chinese government has moved swiftly after pausing many plans for railway
development due to concerns about debt buildup. Some have criticized Beijing’s
crackdown on leverage in the last two years as overly harsh, contributing to
the slowest pace of gross domestic product growth in 28 years in
2018.
The National
Development and Reform Commission suspended approvals of urban transit projects
in August 2017. But in the second half of last year — primarily in December —
the Commission gave seven major Chinese cities the green light for such
projects, Nomura’s chief China economist Ting Lu and his team pointed out in a
Jan. 18 report. As of publication, total investments into such projects reached
714.2 billion yuan ($105 billion), the report noted.
“The
acceleration in the pace of these project approvals suggests that Beijing has
become more concerned with the economic slowdown and is keen to pick up urban
transit investment (a key portion of infrastructure investment) to increase
demand and stabilise economic growth,” Lu said in the report.
Alternative
funding methods
The hope is
that developing projects such as high-speed rail will bring temporary jobs,
economic growth and investment to lesser known areas. Amid concerns about
high-debt levels, analysts said China is trying some alternative financing
methods such as private partnerships and project-based debt issuance.
Infrastructure
spending can also come in the form of investment in technologies such as 5G and
the internet, Vanguard’s Wang said.
With its
“Made in China 2025” plan, Beijing aims to turn the country into a global
technology leader. In a Jan. 22 report, the Economist Intelligence Unit found
that cities which have aligned themselves with the central policy generally
have better growth prospects.
However,
it’s unclear how quickly and to what extent increased spending on such
infrastructure projects will help economic growth. China has already built an
extensive high-speed railway network, especially in the most prosperous
regions. And in another major issue for authorities, the private sector which creates most new jobs is struggling in a financing and operating environment that
still favors state-owned enterprises.
“The
debt-driven model, China cannot totally abandon it,” the Economist Intelligence
Unit’s Wang said. “When consumption cannot drive growth, debt-driven
infrastructure spending is necessary.”
CNBC