Commentary
Chinese investors have been battered this year so far. They will watch closely the upcoming twice-a-decade Chinese Communist Party (CCP) national congress in October for signs of a shift in economic policy.
There are numerous headwinds facing China’s economy—rolling COVID-related lockdowns, a real estate market downturn, ongoing trade issues with the United States, Beijing’s support of Russia’s war in Ukraine, and a hawkish U.S. Fed. Chinese stock investors have already sustained some big losses in 2022, with the Shenzhen Composite Index down by more than 21 percent and the Shanghai Composite down 15 percent since the beginning of the year.
All eyes are now on the national congress event in mid-October; investors are keen to see what economic changes are in store after political winds settle.
What are some of the possible policy changes?
One potential shift is to double down on saving the real estate market. Home prices in China have fallen every month in the last 12 months. China Evergrande—the country’s No. 2 developer and somewhat of a poster child for the industry’s woes—has been tottering since 2020, when efforts to deleverage the sector were introduced. Soured loans have skyrocketed, with Citigroup calculating in September that almost 30 percent—29.1 percent—of all property loans have become “bad debt.”
Broader and deeper stimulus measures for the property market could be in store in October. Bloomberg, in a recent report, expects authorities to assist developers in finishing stalled and uncompleted housing projects. Support for developers can help politically and economically by propping up banks and demand for new mortgages, as well as alleviating ongoing mortgage boycotts from homeowners.
The irony is that Beijing has been trying to help the property sector since the beginning of the year with minimal results. In July, the People’s Bank of China (PBOC) announced 200 billion yuan (about $28 billion) of low-interest rate loans to state commercial banks in order to give developers enough funds to finish real estate projects. That was the first tranche of up to 1 trillion yuan (about $140 billion) of loans approved. Local governments have also created so-called “bailout funds” to invest in unfinished projects. Beijing has also loosened restrictions this year on lending to property developers.
Real estate’s importance cannot be overstated. Almost 70 percent of Chinese household wealth is tied up in the housing market. So despite the Chinese real estate market’s Ponzi scheme-like structure—where new waves of buyers are always needed to help pay for the completion of existing projects—the CCP likely has no option but to keep bailing out the market.
Another key economic decision is to drive consumer spending. On the surface, this is a simpler decision than attempting to drive growth in the real estate market.
To that effect, Morgan Stanley analysts expect a change in China’s longstanding COVID policy. Beijing will likely open up the country to spur consumption, travel, and jobs growth.
“We expect policymakers to take important steps in the coming months that would allow reopening from spring 2023,” wrote Chetan Ahya, chief Asia economist, in a note to clients on Sept. 26.
“The strict COVID management approach has led to challenges of significantly weaker income growth and a sharp rise in youth unemployment—outcomes which are at odds with the policy goal of common prosperity.”
While Morgan Stanley isn’t wrong, this is something Beijing authorities could have done earlier but chose not to. China maintains some of the world’s strictest COVID policies. There have been some tweaks to this policy, but rolling lockdown and mass testing programs remain in place.
What could be different heading into 2023?
The bank’s thesis is driven by its belief that weaker export growth and real estate market woes will not only continue but intensify. A sharp rise in urban youth unemployment could unsettle social stability, while fiscal budgets across the country are already stretched.
These issues leave CCP boss Xi Jinping with no option but to decide on a broad reopening in order to stimulate the economy unless the Party is willing to tolerate a disaster of its own making.
“These preparatory steps could include a renewed vaccination campaign, a reshaping of the public’s perception on COVID and ensuring adequate medical supplies,” according to Ahya.
Neither of these two levers is desirable for the CCP. But assuming Xi gets an expected third term, he has little choice but to ramp up stimulus in the near term.
