22V held a Webinar today on China’s outlook for the rest of 2024, featuring the analysis of our new China economist Houze Song. A replay of the Webinar can be found HERE.
Key points:
- Property activity not close to bottoming: The latest round of property support measures has led to only a transitory rebound in housing sales. A key issue for a recovery is excessively high inventory levels, equivalent to more than one year of sales. The government’s re-lending program to help local governments buy unsold housing is both too small and too expensive to make a big dent in inventory levels. Property investment is unlikely to bottom out in the next 12 months.
- Risk of a vicious cycle from property’s spillovers. Construction sector employment declined by around 2 million jobs y/y in Q2, and new orders for construction plunged in July. The broad weakness in hiring is depressing growth in household income (only 4.5% y/y nominal in Q2) and adding to deflationary pressures. Deflation, in turn, puts further pressure on housing affordability and prices.
- Only modest relief coming from fiscal policy. Tight fiscal policy has been a key drag on growth this year. Fiscal expenditure was up only around 1% y/y in Q2. The weakness is concentrated in local government fiscal resources, constrained by the collapse in land sales and the need to refinance debt. Only the central government has the ability to stimulate. 22V expects the central government to announce additional deficit expenditure of $50 billion in late Q3/early Q4, turning fiscal policy to a neutral but not stimulatory stance.
- Fiscal stimulus will continue to focus on investment, with baby steps towards promoting consumption. Beijing’s consumer upgrading program is a positive move but a small one in the transition to stimulating consumption rather than investment. It will take at least several quarters before stimulus policies have a significant impact on boosting consumption from depressed levels.
- Even with Fed rate cuts, monetary and credit easing will be limited. Fed cuts will narrow US-China interest rate margins and ease depreciation fears. But there are also domestic constraints on monetary easing. Banks’ net interest margins are at a historical low, undermining the profits necessary to absorb non-performing loans and the rollover/reduction of loans to local government financing vehicles. There is thus limited room to lower lending rates in China.
- Nominal growth to come in around 4% this year. Nominal GDP growth is a better barometer of economic conditions in China than Beijing’s official measures of real growth. Given 22V’s basecase of restrained stimulus in coming quarters, nominal growth for this year will be around 4%, weaker than the 4.6% in 2023. There is an upside case of stronger stimulus, such as if export growth falls sharply and Beijing is compelled to boost domestic demand. Exports slowed in July but not enough to change Beijing’s policy reaction function.
- Sentiment signals also show subdued outlook. Yesterday, 22V published the monthly update of its China Economic Sentiment Series (CHESS), which uses ChatGPT to measure the sentiment of analysts commenting in China’s domestic financial media (link to the update HERE). There was a recent pick up in analyst expectations of stimulus, but it is thus far modest in scale. Sentiment towards the economic and financial outlook remains subdued.
