China’s economy could stabilise
Since late August, policy support in China has picked up in pace and strength. While the measures announced are no ‘bazooka’, they are concrete enough and are being implemented quickly so that they could lead to some real improvement in the near term.
Many of the policy measures are focused on the property sector. On 31 August, a cut was announced in the nationwide minimum down payment ratio for first-time buyers to 20% (from 30% previously) and for second-time buyers to 30% (from 40% previously and in some cities as high as 70% in practice). In addition, commercial banks were told to lower the interest rate on existing mortgages taken out by first-home buyers. The scope of these policy measures exceeds market expectations and will likely boost housing demand and market sentiment in the near term. And the reduced financial burden on many homeowners may help bolster the recovery in household spending, which has been sluggish because of low confidence.
Fiscal measures have also picked up speed too with instructions issued to local governments to complete planned 2023 issuance of special bonds that fund infrastructure investment by end-September, and to fully deploy the proceeds by end-October. Important measures have also been taken to address the ballooning local government debt problem, especially debt borne by the so-called local government financing vehicles (LGFVs). On the monetary front, we expect the People’s Bank of China to stay in easing mode. After earlier-than-expected rate cuts in August, the central bank may reduce banks’ reserve requirement ratio again before the end of this year.
In addition to measures to help the real economy, the government has made efforts to boost sentiment in the equity market. These include a halving in the stamp duty and a reduction in the required margin ratio on equity trading. Measures were also announced to slowdown the pace of initial public offerings and to tighten new share issuance by existing companies. New restrictions have also been introduced to control stock sales by major shareholders of companies that do not reach certain minimum requirements in areas such as dividend pay-outs and price-to-book ratios.
Furthermore, there are early signs that purchasing manager indexes for manufacturing are improving, in line with the rising price of industrial commodities in the country.
To summarise, since the Politburo meeting in late July, policy support has started to intensify in both pace and strength. The magnitude of some policy measures has exceeded our expectations. While these measures may not be strong enough to engender a sharp economic rebound, the ones that target the property sector may serve to draw a line under very depressed sentiment in the housing market. Indeed, right after the announcement of the cuts in down payment ratios and the expansion of the first-time buyer definition, housing transactions surged in Beijing and Shanghai.
These developments, combined with some nascent signs of stabilisation in manufacturing activity, have strengthened our conviction that the Chines economy may recover moderately in the second half of 2023. We have decided to keep our current GDP forecast for this year unchanged at 5.2% for now, slightly above the government’s growth target of around 5%.