Measure by measure: Assessing policy support in Asia
Debt problems in the Chinese property sector may weaken investor sentiment towards Asian assets, but China’s issues are distinct from elsewhere in the region
IN RECENT months, the challenges faced by several large China-based property groups have generated pessimistic headlines, as some real estate companies defaulted or requested debt-repayment extensions.
While such developments reflect entrenched issues in this market segment, they can distract from Asia’s more favourable economic environment. For instance, inflation is moderating and interest rate hikes in many markets are now firmly paused, with the potential for reductions on the horizon.
In this column, we first look at China’s targeted policy measures to support its property sector. We also explore whether similar moves are needed in other Asian territories, and how the trajectory of US interest rates will shape the region’s economic outlook.
China real estate: A targeted approach
China’s property sector accounts for around a quarter of its economic activity, and hence debt problems in the sector raise concerns about their knock-on effect. The government has undertaken several measures to contain or limit any damage from a debt-laden real estate market.
For instance, we have seen mortgage rates reduced to a record low and preferential loans for first-time homeowners. The city of Nanjing has lifted housing curbs – that is, prospective homeowners can now buy property without proof of eligibility. Previously, people were limited on where they could buy and how many assets they could own.
Price caps may also be removed from new homes, allowing developers to reduce or increase prices, which should help loosen and stabilise the market. Other cities in China are expected to remove price curbs in the future. These measures should help developers reduce their debts to more manageable levels.
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Some investors have questioned the timeliness and sufficiency of recent moves, especially compared to previous support packages. Yet, it is important to realise that the government’s incremental actions do not stem from a reluctance to intervene. Instead, they reflect a more targeted approach to reduce China’s overall debt levels and steadily limit the property sector’s impact on the wider economy.
Property-sector issues in other markets
Vietnam has also experienced issues in its real estate sector. Apart from China, it is the only other market in the region to reduce its official interest rates in recent months. The government in Hanoi has also launched an anti-corruption drive and investigated land transfers among real estate companies, sparking fears that developers may not have full legal ownership of land needed for projects.
Generally, the property sectors in most Asian markets did not experience the same level of growth seen in China. This means any reversal in fortune would be smaller in scale and impact.
China’s impact on the wider region
The main impact is indirect. As China’s economic growth slows or cautious consumers adjust their spending patterns, the potential demand for products and services from other regional markets could be curtailed.
A harder-to-quantify impact has to do with investor sentiment, which may weaken enthusiasm for the Asian region. Such a reaction is natural, but upon further assessment, investors may view China’s challenges as distinct from the opportunities available in Asia’s other economic sectors and markets.
Interest rates on pause
Except for Thailand, which raised its main interest rate by 25 basis points in August this year, rates have remained broadly on hold across the rest of the region. This has been possible because inflation has softened amid higher borrowing costs weighing on investment and consumption. In previous quarters, interest rates were also raised quite aggressively in many markets.
It is also worth noting that local-currency government bond yield curves in Asia generally moved higher between Jun 1, 2023, and Aug 31, 2023. The Asian Development Bank, in the September 2023 issue of its Asia Bond Monitor, reported that local-currency bonds outstanding in emerging East Asia totalled US$23.1 trillion at the end of June 2023, an increase of 7.9 per cent from a year earlier – this is equivalent to 63.1 per cent of the US bond market and 114.2 per cent of the EU20 bond market.
Fed’s rate changes and Asia’s bond markets
The recent interest-rate holding pattern witnessed across much of Asia reflects how the pace of Fed interest rate tightening has slowed. The Fed needs to bring inflation closer to its longer-term target of 2 per cent, but it is also conscious of labour market conditions and international developments. Its most recent “dot plot” showed that it expects interest rates to stay around 3.5 per cent by 2025, and approximately 2.5 per cent in the long run.
On rate movements, most central banks in Asia will probably follow the Fed, which means the next shift in regional borrowing costs may be downwards. This should help boost consumption and investment, thereby bolstering economic growth in the region.
Overall, investors should perhaps look past the specific problems affecting China’s property sector, to avoid forgoing opportunities that could capture diverse and appealing investment prospects in non-property sectors across Asia.
The writer is Asia-Pacific head of fixed income and head of Singapore, State Street Global Advisors
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