China -- Growth remains steady but storm clouds gathering
Falling housing sales, rising capital outflows are challenges for 2017
- FT Confidential Research data showed the economy holding up in October. Freight and export firms reported improved conditions while the wealth effect from record house price rises has buoyed household sentiment.
- Real estate investment will continue to support the economy into early 2017 even though sales are now sliding.
- Nonetheless, the downturn in housing sales has synchronised awkwardly with the election of Donald Trump. In conjunction with rising US interest rates and associated renminbi weakness, capital outflows are set to intensify, further complicating an already challenging policy environment.
Official October data confirmed the evidence of ongoing stability recorded by our most recent suite of proprietary indices. After a remarkable three straight quarters of stable growth, we believe the 2016 growth target of at least 6.5 per cent is "in the bag".
That is just as well: the surprise election of Donald Trump is just one of a number of "known unknowns" with which the authorities will need to grapple as 2017 gets underway.
Steady as she goes, for now
Our Business Activity Index fell to a three-month low in October, though this was largely the result of the government's clampdown on the housing market (see chart). As expected, window guidance to the banking sector earlier in the month resulted in a drop in mortgage lending as the government stepped up its efforts to rein in the market.
Medium- to long-term borrowing by households, which is mostly for residential mortgage lending purposes, fell to Rmb489.1bn ($71.1bn), down from Rmb574.1bn the previous month and below the monthly average of Rmb526.7bn over the third quarter. But corporate lending also fell sharply on both a month-on-month and year-on-year basis. A surge in government bond issuance may have dampened demand for these loans, though the shortfall in corporate borrowing does suggest ongoing weakness in industrial demand.
Other FTCR data series indicated that economic growth softened relative to September, but they remained well above the low levels recorded at the end of 2015 and start of this year. Our Export Index hit a fresh 2016 high, despite profits falling, while surging freight rates lifted our Freight Index to its highest level in 23 months.
However, China's economic outlook hangs to no small degree on the trajectory of its real estate market. Our monthly survey of developers found an immediate and marked weakening in sentiment in the wake of the government's latest measures.
Nonetheless, October data from the National Bureau of Statistics (NBS) indicated that housing investment continued to rebound from this year's lows. Investment in real estate improved for a third straight month, rising 6.6 per cent year-on-year in January-October and helping to lift overall fixed-asset investment (FAI).
We continue to argue that, even if sales dive - and weekly data for major markets does show they are falling - residual activity stemming from the surge in housing sales earlier this year should sustain investment activity into 2017. In the previous three market cycles, FAI growth took at least six months to reflect changes in sales activity (see chart).
Finding fresh economic support
Despite talk of nurturing new growth drivers, economic activity has this year been underpinned by a decidedly old school mix of a housing market boom and infrastructure construction.
As prospective homebuyers take to the sidelines, the government now has to avoid tightening too much and severely weakening investment and consumer sentiment.
Although the NBS reported a relatively sharp drop in retail sales growth in October, our monthly survey of household sentiment suggests that incomes, financial situations and attitudes towards discretionary spending have recovered sharply in 2016 from lows recorded in the wake of last year's stock market slump.
We largely ascribe this improvement to surging house prices. The wealth effect they have created is clearly visible in the sub-index for discretionary spending among higher-income groups, the majority of whom own two or more properties, according to our research.
All of which means that now that the property market appears to have turned, the government may need to increase fiscal spending in 2017 to support growth.
Capital to take flight once more
They must also face the risk of intensified capital outflows. The cooling of the housing market has synchronised awkwardly with the victory of Donald Trump. His surprise victory has sharply increased US inflation expectations, which in turn has led markets to bet on interest rate rises.
Investors have also homed in on the president-elect's tough talk on China, including his pledge to label it a currency manipulator as soon as he is in the Oval Office.
The renminbi continues to fall sharply against the dollar in the wake of the election result, though this is more to do with the broader sell-off in emerging markets than anything China specific. As the exchange rate falls below year-end predictions, the People's Bank of China has clearly decided to get out of the way of a market stampede.
Our most recent survey of Chinese capital outflows indicated the government managed to staunch the massive bleeding of late 2015 and early 2016 by tightening up existing controls, but also by stabilising the economy through massive provisions of credit. The government argues the renminbi remains stable against the basket of trade-weighted currencies that it began publishing late last year (see chart), but household appetite for foreign exchange assets is only set to increase.
The government is expected to meet for its annual Central Economic Work Conference in December, at which policy priorities for the coming year will be agreed. Recent rhetoric and policy actions suggest it is finally comfortable enough with the state of the economy to focus on deleveraging and other parts of its reform programme. Prior to Mr Trump's victory, we argued that this was a small window of opportunity. It may have just got smaller.
These article was first published on Nov. 16 by FT Confidential Research.
FT Confidential Research is an independent research service from the Financial Times, providing in-depth analysis of and statistical insight into China and Southeast Asia. Team of researchers in these key markets combine findings from proprietary surveys with on-the-ground research to provide predictive analysis for investors.