CHINA: Economy ends 2019 strongly, but property troubles lie ahead

● Modest and targeted stimulus was effective in 2019, and recent economic data is positive. ● But recent stabilization is likely temporary; weakness could resume late in Q1. ● The housing market is the key variable for growth and stimulus in 2020. China's economy ended 2019 strongly, according to fourth-quarter and monthly December economic indicators released on 17 January. Chinese policymakers are likely feeling satisfied with their decision to refrain from heavy-handed stimulus in 2019. But the apparent rebound visible in recent data may prove short-lived, with downward pressure set to resume towards the end of the first quarter. While policymakers are planning another year of economic-policy muddle-through in 2020, further slowdown may force them into difficult choices about whether to adopt heavier stimulus, even at the cost of exacerbating financial risk and encouraging wasteful investment. The outbreak of coronavirus that began in Wuhan may add headwinds, but we will address that risk in a separate note later this week. Temporary resilience, looming weakness Selective easing had its desired effect in 2019. Full-year growth slowed to 6.1% from 6.6% in 2018 but remained within the government's target range of 6-6.5%. Export growth slowed to 1% in 2019 from 10% in 2018 – due largely to the US trade war – but other key indicators were impressively resilient: property fixed-asset investment held steady at 10% for the full year, while infrastructure fixed-asset investment ticked up to 3% from 2% in 2018. Monthly data for December suggests that the worst of the slowdown may now be over. Fixed-asset investment, industrial production, and exports all accelerated sharply, while retail sales were steady. After six consecutive months in contractionary territory, the official manufacturing sector Purchasing Managers Index (PMI) posted its second straight month above the 50-point threshold. The phase-one trade deal is set to unlock some capital expenditures that were delayed due to uncertainty and weak sentiment. But this apparent rebound may prove temporary, with downward pressure set to resume around the end of the first quarter. China has continued to roll out modest stimulus measures in recent weeks. These include a cut to banks' required reserve ratio on 6 January and a net RMB 300bn cash injection via the central bank's Medium-term Lending Facility on 15 January. But credit growth continues to move sideways. Absent measures to boost final demand, liquidity-boosting measures are not strong enough to spark faster credit growth and stimulate real economic activity. Regulators are also pressing banks to increase lending to traditionally credit-starved small businesses, but these efforts also have limited impact due to lack of credit demand. Property is key variable for growth and stimulus Housing will be the crucial swing factor for the overall economy in 2020. Property was a key source of resilience in 2018-19 but could become a drag in 2020. New home sales contracted in terms of floor area in December. A slowdown in land sales this year suggests that growth of new housing construction could turn negative in full-year 2020 for the first year since 2015 – a year of major economic hardship. Last year the Politburo pledged to refrain from housing stimulus, but modest property easing is already underway in small cities. The State Council, China's cabinet, eliminated restrictions on resident registration (hukou) for small cities and relaxed restrictions for large and mega-cities. Easing hukou restrictions enables migrant workers to obtain full social welfare benefits in their adopted cities, encouraging long-term residency and property purchases. A few small cities have also introduced purchase subsidies. Still, nationwide property easing remains unlikely in the short term, as authorities remain concerned that stimulus would lead to further price run-ups. China's dysfunctional land-supply mechanism and closed capital account mean that property easing tends to produce price appreciation rather than significant supply increases. Housing indicators are still mixed, with some data showing continued resilience. If the property market stays resilient, overall growth should remain within the target range of "around" 6% for 2020, and Beijing will stick to its muddle-through approach. But if a construction slump pushes growth to around 5.7%, Beijing could turn less cautious on stimulus. This would involve using both property and infrastructure to generate final demand, while boosting credit growth to finance the resulting investment surge.

January 21, 2020

CHINA: Economy ends 2019 strongly, but property troubles lie ahead

BY Gabriel Wildau

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January 21, 2020

CHINA: Economy ends 2019 strongly, but property troubles lie ahead

BY Gabriel Wildau

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