China’s economic policymakers are faced with the monumental task of steering the economy through the post-COVID era and transitioning from high-speed to high-quality growth. We watch every move of key regulators like the State Council and the central bank for signals of high-level shifts in China’s economic policy. In addition to digging into key indicators like growth, inflation, and trade data, we also keep a close eye on the policy discussion in Beijing, whether it’s coming out of the CCP’s HQ in Zhongnanhai or key opinion leader commentary in state media.
Beijing has major plans to steer more of the country’s savings into domestic capital markets, and, in doing this, to fund the policy-priority sectors that will help drive the next phase of China’s growth – areas such as green energy and advanced manufacturing. Successful capital market reform will also boost returns on China’s vast household assets, channeling savings away from property and personal bank accounts into more productive uses. We explore the policy tweaks – some subtle, others substantial – driving this shift and the impacts on the equities, bonds, futures, and currency markets.
After decades of breakneck growth, in recent years Chinese regulators have been laser-focused on building a financial system that is more efficient, more tightly regulated, and less prone to accumulating major risks. Key themes include financial opening, the emergence of the Greater Bay Area, and the rapid consolidation of the commercial banking sector.
Our commodities team keeps clients up-to-date on price fluctuations across numerous asset classes, including agriculture, energy, and minerals. We monitor key themes such as the economics of Beijing’s multifaceted energy transition, China’s push for critical minerals supply chain self-reliance, and Xi Jinping’s growing emphasis on food security.
China’s property sector is undergoing a once-in-a-generation shift from being a growth-at-all-costs juggernaut characterized by highly leveraged private developers like Evergrande to a stable, predictable industry dominated by state-owned enterprises. We cover the policies behind this transition, along with the ripple effects for home prices, capital markets, local government finances, and downstream industries like construction.
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On Thursday, China’s stats bureau released home price data for February.
Taken together, the data suggests that the sector is staging something of a recovery:
Construction and investment in the industry fell by less at the start of this year:
There are a few caveats, however.
Firstly: The rebound in home sales may partly reflect purchases that were delayed at the end of last year from COVID disruptions.
The other issue: Developers’ weak finances might prevent stronger sales from feeding through into an increase in new housing starts.
Our take: The real estate industry is probably out of the woods – in the sense that things are not getting any worse.
On Wednesday, Bloomberg cited anonymous sources saying that Beijing will cut annual crude steel output – for the third year in a row – to reduce carbon emissions.
Let’s recap: China’s crude steel output has been falling since 2021.
We haven’t seen any official confirmation for this year’s output cut, but it would hardly be surprising.
Get smart: Steel inventories have been oscillating between active destocking (fall/winter 2022) and sudden restocking efforts (post-Lunar New Year construction bump).
Get smarter: Environmental policy is a convenient excuse for cuts in steel output.
The central bank (PBoC) is dipping its toes into geopolitics.
On Wednesday, the PBoC published the readout of a meeting by its senior leadership to discuss the spirit of the Two Sessions.
As you might guess, the leadership underscored stabilizing the economy as one of the top concerns. The PBoC said it would:
And it promised to:
But one thing jumped out at us. In the section on managing risks, the PBoC said it will:
ICYDK: Xi said something similar in a speech last week at the Two Sessions.
Get smart: It is rare for Xi to explicitly call out the US in public. It is even rarer for the PBoC to do so.
Get smarter: That’s changing.
Our take: The PBoC is at the heart of RMB internationalization efforts, which also puts it on the front line of China’s defense against US containment.
Foreign investors now have access to a much wider array of Chinese equities.
On Monday, over 1,000 mainland and Hong Kong companies’ shares were made newly available for purchase through the Hong Kong Stock Connect program.
ICYDK: There are two Hong Kong Stock Connects – one launched with the Shanghai Stock Exchange in 2014 and one with Shenzhen in 2016.
More context: On Tuesday, foreign investors purchased RMB 53 billion worth of mainland shares via the connects, while mainland investors bought RMB 22 billion via Hong Kong.
Some details:
Four Hong Kong-traded international firms were added to the Southbound Connect for the first time, including:
Get smart: This is financial opening with Chinese characteristics.
Encouraging households to splurge on home renovations might be the key to boosting consumption.
This was the recommendation Liu Yuanchun, a trusted economic advisor to Xi Jinping, made on Friday.
In an interview with NBD, Liu – who is also the president of the Shanghai University of Finance and Economics – said that since the late 1990s, China has gone through a home-renovation cycle every 10 to 12 years.
Liu cautioned against the excessive use of vouchers and discounts that focus on a narrowly defined set of goods, and suggested efforts should instead focus on subsidizing low- and middle-income households to make over their homes.
Liu said he expects China’s economy to be driven this year by a combination of investment and consumption.
He also thinks that property could contribute as much as one percentage point to economic growth.
Get smart: Beijing wants consumption to play a central role in driving the economy this year – and encouraging home improvements could be just the kind of creative solution authorities are looking for.