Doubts over China’s economic revival

The current state of the Chinese economy raises the question of whether this is a structural slowdown or a cyclical one. The answer lies in a blend of both factors. The pandemic-induced trade recession has played a role in the downturn. Demand for personal protective equipment (PPE) has waned, and there was an excess of electronics and electronic products purchased during the pandemic. These factors contribute to a cyclical adjustment that will take some time to bottom out.


However, there are longer-term structural issues at play as well. China is grappling with a deflating property sector, a process that is expected to unfold over many years. The sheer size of the property market necessitates a substantial reduction, potentially up to half of its current volume. While it has already experienced a 10% decline in the past two years, there is still a long way to go. Survival in this context requires rapid downsizing, and those expecting government intervention to reinflate the market may be disappointed.


Implications of a Shrinking Property Market

The shrinking property market will inevitably lead to a contraction in household wealth, a phenomenon seen in other Asian countries like Japan, Taiwan, and Hong Kong. While this poses psychological challenges, its real economic impact remains uncertain. It’s essential to recognize that fluctuations in property values often have a more transient impact on the ground. The primary focus should be on the property sector’s transformation into a smaller, healthier entity.


Beijing has introduced measures to alleviate some of the property sector’s challenges, such as reducing rates for existing mortgages, deposit rates for lenders, and down payments for home buyers. These steps aim to mitigate the pain but not to stimulate the sector to its former exuberance. The government appears to have accepted the reality of an unsustainable property market and is focused on minimizing disruption.


Crackdowns initiated by banking regulators in recent years have exacerbated the property sector’s troubles. While there may be government efforts to protect small savers and mitigate losses, wealth destruction among high-risk product investors seems inevitable.


Potential Default by Property Developers

The potential default by property developers like Country Garden, who have an extensive portfolio of building projects underway, is a significant concern. However, it’s worth noting that while the scale is substantial, it may be manageable within the financial framework. The government’s approach is likely to focus on sustaining financing for ongoing construction, ensuring that pre-paid property buyers eventually receive their properties. This approach aims to maintain social stability.


Consumer Confidence and Economic Outlook

A critical question is whether homeowners will have to accept lower property prices as part of the sector’s restructuring. This has implications for consumer confidence and household wealth. While there is a risk of entrenching a deflationary mindset, particularly concerning income expectations, the fundamental issue lies in the income bias of the Chinese economy. The emphasis on government and investment, coupled with limited prospects for consumption-led growth, suggests a prolonged period of low economic growth.


Global Investor Confidence and Opportunities


Global investor confidence in China’s financial markets has faced challenges. It’s vital to recognize that many companies profited during a period resembling a bubble, and the shift in the business landscape has tempered income expectations. However, new opportunities are emerging, particularly for Chinese companies aiming to lead the supply chain and offer branded products. Investors need to adapt to these changing dynamics and recognize that China remains a large and growing economy with various opportunities, though they may not align with the existing players.


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