China: Further efforts to stabilise near-term growth
Recent data from China has shown encouraging signs of further stabilisation. Last week’s Q3 GDP release beat expectations (4.9% vs. 4.5% consensus). GDP growth was supported by strong consumption, while the contribution from net exports was negative. September data also show an improvement in retail sales and services production, while industrial production growth has stabilised.
As household disposable income continues to recover from the lows of the pandemic, Chinese consumers have been spending more. In fact, Q3 was the first time that household savings growth turned negative since the end of Covid restrictions. Consumers spent more on services and restaurants. Spending on goods also picked up in September with discretionary items such as clothing and jewellery. Not surprisingly, spending on items related to housing (such as building materials and decorations and household appliances) has been weak.
Industrial production growth was stable at 4.5% year-over-year in September. Strategic sectors such as auto and electrical machinery have outperformed, and fixed asset investment in these sectors has been robust. However, the weak housing market continues to weigh on investment and industrial production. Private sector sentiment also remains weak and private fixed asset investment has been flat so far this year.
The housing market may also have bottomed out. While housing sales have remained weak, year-over-year comparisons have improved and new mortgage issuances have increased. Given last year’s very weak Q4, it is likely that housing sales and starts could continue to improve through the end of 2023. The measures announced over the past 12 months to support housing demand have not brought potential buyers back in droves, mainly because they still expect prices to fall further and are still not convinced that developers will finish their projects.
In our view, the government’s reluctance to provide further support to real estate developers has shown that it is willing to let the inevitable correction in the housing market play out over time. They have decided to redirect their resources away from the unproductive housing boom to more strategic sectors such as green technology and high-tech manufacturing since 2020. This is evident in bank lending data, where we see rapid credit growth in manufacturing and green industries. In contrast, the growth of real estate loans (which include residential mortgages and loans to developers) is declining. Still, the share of real estate loans is significant at around 20% (and much larger than manufacturing, at around 10%). This means that the resolution of bad loans and non-performing assets will be an important part of the reallocation of resources to other sectors.
In 2024, we expect the resource reallocation to continue. This means that the housing sector will continue to shrink (but at a slower pace), while the manufacturing and green sectors will continue to add capacity. Given a low base this year, the housing sector’s negative contribution to growth next year should be smaller. While we believe that the consumption boom still has legs in 2024, consumer sentiment will also depend on how housing prices develop.
On 24 October, China announced the approval of an additional RMB 1 trillion in central government bonds to support infrastructure investment related to the reconstruction of flooded areas starting in Q4 2023. This implies an increase in the fiscal deficit of almost 1% of GDP this year. The local government bond quota will also be frontloaded next year. In our view, this sends a strong signal that the government is committed to stabilising near-term growth and should cement the ability to achieve its 5% growth target. It also shows that the government is aware of the external headwinds next year and has made efforts to offset them with fiscal spending. However, investors are still concerned about the lingering risks from the real estate sector. Therefore, some decisive steps to deal with real estate developer and local government debt at this week’s high-level financial policy conference could help improve sentiment.
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