China’s economy is weakening sharply under the combined pressures of slowing credit growth, regulatory tightening, and a rapidly deteriorating property sector. Markets are searching for an inflection point in policy, but political factors are disrupting normal economic policy-making and preventing countercyclical policy signals from being clearly heard. Policy overshooting is a far more significant risk in an increasingly centralized political environment.
Additional easing steps around the mid-December Central Economic Work Conference are probable, but Beijing is likely to keep high-level restrictions targeting the property sector in place. Policy measures will focus on correcting the current overshooting in financing controls on developers, particularly those imposed by local governments. The extent of monetary easing will determine the timing of stabilization in credit growth, with the recent announcement of the PBOC’s green relending tool providing a boost. Still, any turnaround in credit growth or cyclical momentum is improbable until late Q1 2022, at the earliest.
