China economic outlook
Property prices have undergone a sharp correction since their peak in the fourth quarter of 2007, accompanied by a contraction in property sales volume. Despite a number of measures being launched in recent months, no strong evidence of a genuine...
Property prices have undergone a sharp correction since their peak in the fourth quarter of 2007, accompanied by a contraction in property sales volume. Despite a number of measures being launched in recent months, no strong evidence of a genuine recovery in the property market is evident. Sentiment is bleak, and expectations of more price corrections are entrenched among potential consumers - this is likely to weigh on property prices in the coming months.
Nonetheless, recently announced measures should help to reduce transaction costs and improve affordability, which should help stabilise or increase transaction volumes. This should lead to price stabilisation and a genuine recovery in the long term. In addition, the cumulative 216 basis points cut in the one-year lending rate over the past four months, plus the lower down payment requirement (to 20 per cent from 30 per cent) and 30 per cent discount in mortgage rates for first-time buyers should improve affordability and spur potential buyers with rigid demand to take action in the near term. Further measures and reductions in the lending rate are also expected in the coming months.
As an economic cornerstone, the weakness in the property market - accounting for 21 per cent of fixed assets investment (FAI), and 10 per cent of GDP - highlights the risks of a consequent slowdown in related sectors. The Chinese export sector has also been hit hard by the global recession. The weakness in both external and domestic demand is forcing enterprises to cut inventory and poses the serious threat of a hard landing.
Against such headwinds, the government has launched a stimulus package of six to seven per cent of GDP, which will be primarily spent on railways, other transportation infrastructure, public housing projects, rural areas and other social projects still dominated by state-owned enterprises.
The massive government-led investment should replace exports as the key growth driver. On property investment, the public housing projects should partially offset the slowing private property investment. Manufacturing investment is likely to be subdued in 2009 due to export weakness. However, this could be counteracted by investment in infrastructure and other social projects, which will create jobs, spur private consumption and boost demand for metal and machinery products.
To what extent can the stimulus package help the private sector?
First, massive tax cuts should meaningfully reduce enterprises' financial burden. Specifically, higher export VAT rebates should provide relief to exporters while the nationwide launch of investment tax credit is equivalent to a RMB120 billion tax cut per year, encouraging enterprises to speed up FAI by purchasing advanced equipment.
Second, the unprecedented interest rate cuts (another 189 basis points cut by the second quarter, is expected) will effectively lower borrowing costs. The cumulative effect should improve the affordability for potential property buyers, hence provide support to the property market, whose recovery is critical to drive related sectors out of the cyclical downturn.
Third, although the bulk of the stimulus package is spent on public-led infrastructure projects, this will generate demand for steel, cement, machinery equipment and other products, which will directly benefit related sectors.
Fourth, the government's initiatives to boost consumption through a number of concrete measures are taking effect. For instance, the subsidies on farmers' purchases of home appliances should generate an additional RMB230 billion demand per year for the next five years. This should effectively mitigate the pain of electronic appliance producers who are facing smaller orders from abroad.
To what extent can domestic consumption offset exports, and is this a structural trend?
Domestic consumption has held up reasonably well so far. Consumption expansion should become a secular trend due to the steadily rising wealth level, pro-consumption policies gradually filtering through, and the improvement in social security to reduce precautionary savings.
Despite the increasing uncertainty in income and economic growth, a number of factors will be supportive of robust domestic consumption growth in 2009. First, the government-sponsored projects, after filtering through in the second half of 2009, should partially offset job losses in the export sectors.
Second, only around 10 per cent of urban non-manufacturing employment (accounting for nearly 65 per cent of total urban jobs) will likely see job cuts while the majority of non-manufacturing sectors, specifically state-owned public and service sectors, should stay intact due to their insensitivity to cyclical changes.
Third, the negative wealth effect is less significant than what many people believe as the tumbling stock market has a very limited impact on overall consumption, albeit directly impacting demand for high end goods and services. The impact of negative wealth on property is even smaller as only 40 per cent of urban residents live in commercial property with minimum default risk thanks to the high down payment ratio (generally 30 per cent).
Last but not least, rural consumption should hold up well in 2009, as the stimulus package not only supports rural income growth but also directly stimulates rural consumption. On one hand, construction projects should accommodate millions of migrant workers to mitigate job losses in manufacturing, while higher grain purchasing prices will lift farmers' income by three to four per cent this year.
In addition, the recent land reform is helpful to increase farmers' wealth through the rental and sale of land, and improving productivity by allowing economies of scale in the agriculture sector, while direct subsidies on farmers' purchases of home appliances should boost rural consumption.
• This report was compiled by the marketing department of HSBC Bank Malta plc on the basis of economic research and financial information produced by HSBC International Bank.
Nonetheless, recently announced measures should help to reduce transaction costs and improve affordability, which should help stabilise or increase transaction volumes. This should lead to price stabilisation and a genuine recovery in the long term. In addition, the cumulative 216 basis points cut in the one-year lending rate over the past four months, plus the lower down payment requirement (to 20 per cent from 30 per cent) and 30 per cent discount in mortgage rates for first-time buyers should improve affordability and spur potential buyers with rigid demand to take action in the near term. Further measures and reductions in the lending rate are also expected in the coming months.
As an economic cornerstone, the weakness in the property market - accounting for 21 per cent of fixed assets investment (FAI), and 10 per cent of GDP - highlights the risks of a consequent slowdown in related sectors. The Chinese export sector has also been hit hard by the global recession. The weakness in both external and domestic demand is forcing enterprises to cut inventory and poses the serious threat of a hard landing.
Against such headwinds, the government has launched a stimulus package of six to seven per cent of GDP, which will be primarily spent on railways, other transportation infrastructure, public housing projects, rural areas and other social projects still dominated by state-owned enterprises.
The massive government-led investment should replace exports as the key growth driver. On property investment, the public housing projects should partially offset the slowing private property investment. Manufacturing investment is likely to be subdued in 2009 due to export weakness. However, this could be counteracted by investment in infrastructure and other social projects, which will create jobs, spur private consumption and boost demand for metal and machinery products.
To what extent can the stimulus package help the private sector?
First, massive tax cuts should meaningfully reduce enterprises' financial burden. Specifically, higher export VAT rebates should provide relief to exporters while the nationwide launch of investment tax credit is equivalent to a RMB120 billion tax cut per year, encouraging enterprises to speed up FAI by purchasing advanced equipment.
Second, the unprecedented interest rate cuts (another 189 basis points cut by the second quarter, is expected) will effectively lower borrowing costs. The cumulative effect should improve the affordability for potential property buyers, hence provide support to the property market, whose recovery is critical to drive related sectors out of the cyclical downturn.
Third, although the bulk of the stimulus package is spent on public-led infrastructure projects, this will generate demand for steel, cement, machinery equipment and other products, which will directly benefit related sectors.
Fourth, the government's initiatives to boost consumption through a number of concrete measures are taking effect. For instance, the subsidies on farmers' purchases of home appliances should generate an additional RMB230 billion demand per year for the next five years. This should effectively mitigate the pain of electronic appliance producers who are facing smaller orders from abroad.
To what extent can domestic consumption offset exports, and is this a structural trend?
Domestic consumption has held up reasonably well so far. Consumption expansion should become a secular trend due to the steadily rising wealth level, pro-consumption policies gradually filtering through, and the improvement in social security to reduce precautionary savings.
Despite the increasing uncertainty in income and economic growth, a number of factors will be supportive of robust domestic consumption growth in 2009. First, the government-sponsored projects, after filtering through in the second half of 2009, should partially offset job losses in the export sectors.
Second, only around 10 per cent of urban non-manufacturing employment (accounting for nearly 65 per cent of total urban jobs) will likely see job cuts while the majority of non-manufacturing sectors, specifically state-owned public and service sectors, should stay intact due to their insensitivity to cyclical changes.
Third, the negative wealth effect is less significant than what many people believe as the tumbling stock market has a very limited impact on overall consumption, albeit directly impacting demand for high end goods and services. The impact of negative wealth on property is even smaller as only 40 per cent of urban residents live in commercial property with minimum default risk thanks to the high down payment ratio (generally 30 per cent).
Last but not least, rural consumption should hold up well in 2009, as the stimulus package not only supports rural income growth but also directly stimulates rural consumption. On one hand, construction projects should accommodate millions of migrant workers to mitigate job losses in manufacturing, while higher grain purchasing prices will lift farmers' income by three to four per cent this year.
In addition, the recent land reform is helpful to increase farmers' wealth through the rental and sale of land, and improving productivity by allowing economies of scale in the agriculture sector, while direct subsidies on farmers' purchases of home appliances should boost rural consumption.
• This report was compiled by the marketing department of HSBC Bank Malta plc on the basis of economic research and financial information produced by HSBC International Bank.