Chinese Economy

FAN YU is an expert in finance and economics and has contributed analyses on China’s economy since 2015. Fan Yu

China Tipping into Chaos, Again

Observers say the stimulus measures can only slow the bleeding

Beijing has begun economic stimulus measures since the 20th National Congress in October. But in typical Chinese Communist Party (CCP) fashion, the signals are mixed and Western investors hoping for broad economic reform will likely be left disappointed.

Chinese stocks have been in rally mode through November, especially the big tech companies, reversing an almost two-year slide. Shares have declined along with news of record-high officially reported COVID-19 infection rates, signaling that the market triumph could be more “dead cat bounce” than “traditional turnaround.”

On the real estate front, the CCP introduced a slew of policy-loosening measures to support developers. Beijing’s leadership seems to have finally realized the precarious situation real estate developers were in and the systemic nature of its risks.

China’s six largest state-owned banks came out to offer more than 925 billion yuan (US$130 billion) in credit support to property developers in an attempt to stem contagion amidst a continued liquidity crunch in the country’s property sector. China Vanke Co., Midea Real Estate Holding, Country Garden Holding, and China Overseas Land and Investment were some of the developer beneficiaries.

China’s central bank and the banking regulator released a joint policy document on Nov. 23, outlining ways the country’s financial institutions should set expectations on real estate transactions including down payment ratios and interest rate boundaries to support the real estate sector.

However, these support measures are unlikely to alter the negative trajectory of China’s real estate market.

Despite being a key driver of China’s economic growth over the last two decades, CCP leader Xi Jinping is still committed to a broad deleveraging campaign that was introduced in 2020.

There are still strict standards that limit developers’ ability to borrow, especially non-government-owned developers. “If it is central or local state-owned developers applying for development loans, we will generally approve them as long as there are no significant issues with their projects,” a real estate banker at a stateowned bank told Caixin, a mainland business magazine.

“But when it comes to private developers, we are very cautious, and we must do proper due diligence on them and their projects.”

Most economic observers don’t expect these stimulus measures to do anything except slow the bleeding. For a broad recovery in property sales, a confluence of factors must improve including consumer confidence, economic policy shift, a broad COVID reopening, and other financial incentives.

“Because of the Zero-COVID policy, all the ongoing property easing might not be transmitted into the property sector recovery,” Hui Shan, Chief China Economist at Goldman Sachs, told Bloomberg TV in a Nov. 23 interview.

The faint hope investors had of China reopening post-COVID is all but dashed. Western investors had hoped for a moderation of China’s “zero-COVID” policy. Chinese authorities had trimmed quarantine length and announced other measures to somewhat relax COVID controls, but Beijing’s bungled reopening has instead sent positive cases soaring and putting large swaths of China’s population back in lockdown mode.

A significant flare-up in COVID cases has now sent officially reported daily positive cases soaring above the worst days of the Shanghai lockdowns earlier this year. The biggest hit cities include Beijing, the southern cities of Guangzhou and Shenzhen, and China’s western population center Chongqing. New lockdowns were announced in the northeastern city of Changchun as well as Shanghai.

On-and-off lockdowns have caused social issues, including the widely reported worker protests at Foxconn’s iPhone factory in Zhengzhou, and the censoring of a viral WeChat post criticizing CCP’s tough COVID policies. Protests have also erupted across the country, demanding the easing of restrictions.

Wall Street remains optimistic though. “While we think the direction toward re-opening is clear, the ups and downs along the way mean possibly heavier headwinds to near-term growth,” Morgan Stanley’s Chief China Economist Robin Xing wrote in a note to clients on Nov. 23.

The CCP is following its well-worn playbook of giving just enough for global investors to keep believing in China’s economic story while clamping down on political, economic, and ideological control.

The CCP is following its well-worn playbook of giving just enough for global investors to keep believing in China’s economic story while clamping down on political, economic, and ideological control.