Stars aligning for China’s recovery

CHINA made a few policy adjustments in the past few days by signalling that, 1) it is putting in place an exit plan for the zero-Covid policy and 2) relaxing more significantly the property market policy. These policy shifts are important (though early) indications that Beijing may finally be working on easing the two most important drags on China’s economic growth and asset markets.

The negative forces

We have been arguing that the zero-Covid policy and property market woes were the two biggest drags on China’s GDP growth and asset markets. They have not only created uncertainty that has hurt public confidence in consumption and investment, but they also caused disruption to production, supply chains and mobility.

Under these circumstances, monetary easing has become ineffective. China should fix the confidence problem and use forceful fiscal expansion to revive growth momentum. These recent policy announcements seem to indicate a shift in this direction.

Policy pivot

Refinement of zero-Covid policy: On 11 November, Beijing released 20 measures to refine its stringent Covid controls. They include shortening quarantine period, removing quarantine for indirect close contacts, cancelling the “circuit breaker” scheme for inbound flights, limiting the use of PCR tests, narrowing the coverage of risk areas, cracking down local add-on restrictions, accelerating booster vaccination, improving the health care system, and piling up anti-Covid drugs.

While the implementation of these changes are still fraught with uncertainty, the policy twist signals a significant shift away from the focus of eliminating the virus to forming an exit plan for the zero-Covid policy. The official communication has also changed from focusing on the danger of the virus to emphasising an increase in vaccination for the older population (especially 80+ year-olds), improvement on healthcare and hospital facilities and piling up of anti-Covid medications. We have long argued these would be the steps to increase both the public and Beijing’s confidence to exit the zero-Covid policy.

Property market policy: On 13 November, the People’s Bank of China and the China Banking and Insurance Regulatory Commission jointly issued a package of 16 measures to bolster support for delivery of property projects and stabilising property transactions. The measures enhance financial support for developers, including privately-owned developers, and protect homebuyers’ legal rights.

This is the first time since the problem of Evergrande emerged in mid-2021 that a written regulation is issued to ease the property sector’s financial problems. The move may mark a turning point for property market woes, as Beijing is now more organised to implement stronger support for the sector than the earlier window guidance and piecemeal approach.

In conjunction with the easing measures that have been implemented, these new and more comprehensive measures, if implemented properly, will go a long way to reduce the number of potential defaults and, hence, credit risk in the system, diffuse the contagion risk stemming from the mortgage boycott and improve public confidence.

Stars are aligning

China has recalibrated its Covid controls, with increase in vaccination and expansion of Covid-specific medical capacities as signposts for an eventual exit from the zero-Covid policy. The new property market support measures suggest the worst is over with a market recovery in sight, albeit only slowly.

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If the policy changes are implemented properly, China’s 2023 GDP could grow stronger than the prevailing market consensus of sub-4 per cent, as easing of the Covid policy should boost consumption, and that would augment production and investment to boost GDP growth momentum. The stabilisation of the property market could also go a long way to help improve public confidence in both consumption and investment.

Externally, if the Fed’s policy tightening slows down as the market expects, global risk appetite will improve and that should help boost sentiment in Chinese assets. Note that MSCI China is trading at 9x forward PE, two standard deviations below long-term average, and most investors are tactically underweighting China. Portfolio flows could return to China in 2023, boosting the CNY-USD exchange rate, as sentiment turns around from extreme pessimism.

The stars may be aligning for China’s recovery.

The writer is senior market strategist (Asia-Pacific), BNP Paribas Asset Management.