Written by Mali Chivakul, emerging market economist at J. Safra Sarasin Sustainable Asset Management
China’s 3Q GDP beat expectations and September data show further signs of stabilisation. The housing market has remained the weak spot but may have bottomed out.
In 3Q, Chinese households started to save less for the first time since the end of Covid restrictions. This has supported consumption and services activity. The post-Covid consumption boom will likely continue to support the economy next year. Selected manufacturing sectors which have received more credit support in the last 3 years have performed better.
We expect the diversion of resources away from the real estate sector to strategic manufacturing sectors to continue. But given that the large size of the housing sector and its related industries, such resource reallocation will still weigh on 2024 growth. The fiscal deficit expansion announced yesterday signals the government’s commitment to stabilising near-term growth.
Latest data show further sign of stabilisation
Latest data from China are showing encouraging signs of further stabilisation. The 3Q GDP release last week beat expectations (4.9% against 4.5% consensus). GDP growth was supported by strong consumption while net exports’ contribution was negative. September data also show an improvement in retail sales and service production, while industrial production growth has stabilised.
Household savings growth turned negative in 3Q
As household disposable income continues to recover from the pandemic lows, Chinese consumers have been spending more. In fact, 3Q was the first time that household savings growth turned negative since the end of Covid restrictions. Consumers have been spending more on services and restaurants. Spending on goods also picked up in September with discretionary items such as garments and jewellery. Not surprisingly, spending on items that are associated with housing (such as building materials and decorations and household appliances) has been weak.
Stable industrial production and investment
Industrial production growth in September was stable on a year-over-year basis at 4.5%. Strategic sectors such as auto and electrical machinery have performed better than average and fixed asset investment has been robust in these sectors. The weak housing market, however, continues to weigh on investment and industrial production. Private sector sentiment also remains poor and private fixed asset investment has been flat year to date.
The housing market may have bottomed out
The housing market may have also bottomed out. While housing sales have remained weak, year-over-year comparison has improved and new mortgage issuances have increased. Given last year’s very weak 4Q, it is likely that housing sales and starts could improve further to the end of 2023. Measures to support housing demand, released in the last 12 months, have not brought back potential buyers in droves mainly because they still expect further falls in prices and they are still not convinced that developers would finish their projects.
Resource reallocation away from real estate towards strategic sectors
In our view, the government’s reluctance to further support the real estate developers has shown that it is willing to allow the inevitable housing correction to happen over time. They have decided to pivot their resources away from the unproductive housing boom to more strategic sectors such as
green technology and hi-tech manufacturing since 2020. This is clear in the bank lending data where we see rapid credit growth to manufacturing and green industries. Growth of real estate loans (which include residential mortgages and loans to developers) has been falling in contrary. Still, the real estate loan share is significant at around 20% (and much bigger than the manufacturing sector at around 10%). This means that working out bad loans and non-performing assets will be an important part of resource reallocation towards other sectors.
Near-term growth to remain under pressure from the housing market but supported by consumption
For 2024, we expect the resource reallocation to continue. This means that housing sector will continue to shrink (but at a slower pace) while manufacturing and green sector will continue to build more capacity. Given a low base this year, the housing sector’s negative contribution to growth next year should be smaller. While we think that the consumption boom still has its leg in 2024, consumers’ sentiment will also depend on how housing prices develop.
The latest announcement of an increase in the fiscal deficit sends a strong signal that the government prioritises near-term growth
Yesterday China announced an approval of an additional RMB 1 trillion central government bonds, to support infrastructure investment related to reconstruction of the flooded areas starting in 4Q2023. This implies an almost 1% of GDP increase in the fiscal deficit this year. Local government bond quota next year will also be frontloaded. In our view, this sends a strong signal that the government is committed to stabilising near-term growth and should cement the ability to meet its 5% growth target. It also shows that the government is aware of external headwinds next year and has made an effort to offset that with fiscal spending. Investors are still concerned however on the lingering risks from the real estate sector. Therefore, some decisive steps to deal with real estate developers’ and local governments’ debt at next week’s high-level financial policy conference could help improve sentiment.
