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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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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Exports: End of an Exceptional Era

China’s exports and manufacturing for overseas demand have been key engines of growth throughout the past two years as the COVID pandemic has distorted global trade flows. China’s goods trade surplus reached a record $676.2 billion in 2021, around 3.8% of GDP. This year, however, momentum in the export sector should weaken as China finally surrenders some market share to other Asian economies and global demand shifts away from goods and toward services. Recent currency strength and a rising dollar should also pressure China’s competitiveness. As a result, exports could begin falling in year-on-year terms as early as Q2 2022, weakening headline industrial production and credit growth.

Posted January 14, 2022
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