How China’s economy will change
China's economy will be based less and less on construction and imports. Trade and investment will continue to shift from developed markets to emerging markets. Analysis by Dave Loevinger, managing director, EM Sovereign Analyst, TCW
An old adage says that the night is darkest before the dawn. China's prospects remain difficult, but we have reached a point where, with such low expectations, perhaps the threshold for being positively surprised by new macro data and government policies has also lowered.
GROWTH PROSPECTS
This was the case with the August data showing better than expected results. Despite widespread negative sentiment, there was a glimmer of cautious optimism that the economy may have bottomed out last July. No one expects a strong recovery in China's economy as real estate investment remains weak and global demand slows. For this year, and next, we could see growth around 4% and a gradual slowdown towards 3% by the end of the decade.
The percentage could be even higher or lower, it will depend on what happens to the private sector and household confidence. We could see a positive self-reinforcing cycle: the economy improves, confidence increases and investment spending also increases. On the other hand, the opposite could happen: the real estate sector continues to slow down growth, confidence worsens, private businesses and families reduce investments. 4% growth is not as impressive for China as it may have been in past years, and one needs to look at this percentage in perspective.
At a global level, in fact, the main economies are growing at decidedly slower rates . The United States of America is probably a 1.5 or 2% growth economy. Europe is definitely below 2%, probably more than 1.5%. And Japan is a less than 1% growth economy. Not only are expectations of lower growth weighing on Chinese asset valuations, but also greater uncertainty about the country's final direction. Regarding real estate, private sector support and geopolitics, confidence in China's central government has increased, quite high in its ability to support big banks and local governments. While the target is around 5%, at 4.5% or so, China would still get close enough to say it hit its target.
THE IMPACT OF RECENT MEASURES
In recent years we have not seen any major stimulus, rather a policy of progressive and steady easing that is starting to add up. In practice, China is dismantling a decade of real estate policies based on the idea that demand was greater than supply: mortgage rates are being reduced and restrictions on the number of homes that can be purchased are being eliminated. This is all useful, although the biggest impact will likely only be seen in larger cities, where demand is strongest. Monetary policy has been significantly eased by cutting rates, which will remain low for longer.
This certainly contributes to alleviating the pressure on debtors under stress, reducing the risk of default and, thanks to the contraction in mortgage rates, increasing the spending capacity of families. There is still a trust issue. Despite lower rates, the private sector and households are reluctant to take out new loans. Finally, infrastructure will continue to be a support, with more fiscal stimulus expected for urban renewal, although the amounts are likely to be modest.
THE CONSEQUENCES ON THE GLOBAL ECONOMY
Interestingly, in 2007, Premier Wen Jiabao said that China's economy was unstable, unbalanced, uncoordinated and unsustainable. And that was before we saw a credit-fueled real estate and infrastructure boom that lasted for another decade. Government guidelines now appear to have changed. China's leadership is convinced that the old playbook got them into this situation. So when the authorities talk about sustainable and quality growth, it means that they have no intention of returning to the old pattern and that they are willing to endure some short-term trauma to get where they want.
China now recognizes that fundamentals, such as a shrinking population, do not support high levels of real estate investment and that it is better to shift investments from real estate to technology, in part to reduce vulnerability to US sanctions. Furthermore, technology reduces the intensity of carbon dioxide emissions and can represent a new growth engine for a demographically shrinking and aging population. Broadly, we see China's real estate sector gravitating towards the Singapore model, with more public housing, both owned and rented. We are also convinced that relations with the United States will remain difficult in the coming years. So, just like in the United States, international risk reduction and national security concerns will take precedence over growth objectives in China. This means that for the rest of the world, China's growth will not only be lower, but will also be very different and more service-oriented.
It will be an economy based less and less on construction and imports. Trade and investment will also continue to shift from developed markets to emerging markets. There will be a shift from raw materials such as iron, minerals and coal to commodities such as nickel, copper and cobalt. Of course, other emerging markets will also benefit, as companies around the world adopt strategies to reduce the risk of dependence on the Chinese supply chain. What does this mean for the markets? It is clear that rates will remain lower for longer. China is doing everything it can to keep exchange rate expectations anchored, but the divergence between US and Chinese monetary policies, with US rates higher for longer and Chinese rates lower for longer, will keep the pressure on on the renminbi. The Chinese currency will continue to depreciate until US growth changes direction and the market begins to more aggressively price in rate cuts.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/come-cambiera-economia-della-cina/ on Sun, 29 Oct 2023 06:07:47 +0000.