State-Owned Developers: Not Enough Lifeboats

Beijing is attempting to mitigate widespread financial distress in the property sector by encouraging mergers and asset sales by distressed developers, usually to stronger state-owned peers. But state developers only have a small presence within the industry, and are constrained in how much assistance they can provide for the sector as a whole. Only a limited number of distressed private developers can plausibly receive lifelines.

We estimate that for the entire property industry, state-owned developers could only increase their debt levels by around 1.6 trillion yuan, which is far less than the cash needed to offset the current decline in property sales and continue construction at close to 2021 levels. SOE developers are not trying to rescue their private competitors, but to profit from fire sales of quality assets, as recent deals have fetched deep discounts.

Posted January 25, 2022
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The Gravity of Zero

Beijing is facing a new policy dilemma in grappling with how to exit strict measures to control the spread of COVID, with no clear solution on the horizon. The economic costs of these controls are only likely to escalate in 2022, given the continued spread of the Omicron variant, with little chance of eliminating the virus in China. But there are few scenarios for relaxing controls without seeing significant contagion that would undermine China’s political messaging of success in limiting the pandemic so far.

International travel restrictions are likely to remain in place for all of 2022 or longer. But following the Winter Olympics, the probability of Beijing relaxing local virus suppression measures will rise, particularly as economic and political costs escalate. Household consumption and services sector enterprises may not recover meaningfully this year, but there will be immediate pressures to at least keep ports and factories operating within an already flagging economy. Incentives for local officials can change quickly in China’s political system, and propaganda messages can reverse on a dime.

Posted January 21, 2022
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Q4 2021 China Macro Data Recap

China’s headline real GDP growth slowed to 4.0% y/y in Q4, weighed down by the flagging property sector. Today, the PBOC intensified its response to the slowing economy with the first interest rate cut since April 2020. While most indicators pointed to COVID-related lockdowns and travel restrictions limiting household consumption and income growth, official expenditure-side data surprisingly showed consumption driving economic growth in Q4.

Surprises in 2021 full-year data included producer price inflation on the high side, led by global crude prices, and on the low side, a full-year 5.4% decline in crude oil imports. Continued monetary easing and stronger private sector credit demand will be critical to kickstart a recovery in 2022, along with improvements in property sales. Birth rates continued declining in 2021, suggesting China’s overall population will peak this year or next.

Posted January 17, 2022
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