As of December 16, 2023, all economic data from January to November has been released. Looking at several key economic indicators, industrial added value accumulated year-on-year growth stood at 4.3% for January to November, while the service industry production index saw an 8.0% year-on-year increase. The full-year GDP growth rate for 2023 is likely to remain around 5%, meeting the expected economic goals. Compared to our forecasts from last year, the resilience of exports far surpassed expectations. Export growth, measured in RMB, continues to show positive growth, and after November, the export situation is notably improving. Despite the RMB-priced export volume maintaining around 0% growth in 2023, significant shifts occurred in trade patterns, with China’s trade share in Belt and Road and Southeast Asian countries steadily rising. Overall investment from January to November saw a cumulative year-on-year increase of 2.9%, surpassing our initial estimates by 2-3 percentage points, primarily driven by robust manufacturing sector investments. However, consumer data fell below our expectations, with social retail sales from January to November accumulating a 7.2% year-on-year growth, 1-3 percentage points lower than our anticipated 8-10%.
According to the Central Economic Work Conference’s guiding principle of “seeking progress while maintaining stability, promoting stability through progress, setting up before breaking,” the economic growth rate is likely to trend upward, remaining around 5% based on the 2023 foundation. This goal is expected to expand further by adding fiscal deficit rates up to 3.8% within the year. In 2024, the fiscal deficit rate is likely to maintain at this level. To achieve an economic growth rate of around 5%, the outlook for exports seems optimistic, infrastructure investment within investments appears secure, and consumption has become crucial. Under the effects of two consecutive years of low base, stabilizing real estate’s year-on-year growth rate becomes paramount. Regardless of whether it’s 2021, 2022, or 2023, the key to real estate growth lies in the smoothness of property sales receipts. However, even if banks increase credit to real estate through mortgage loans, there are simply no viable properties available for mortgages. The profound economic contraction caused by the deep adjustment in property prices has resulted in continuous M2 growth rates higher than M1 growth rates in 2023, with a gap of 8.7 percentage points. High-velocity money within the economy has been consistently decreasing, correlating with a sluggish increase in stock asset prices and the Hang Seng Index. Particularly in 2023, despite the overall rise in global stock markets, the high liquidity asset prices in China’s capital market have continued to shrink. Since the beginning of this year, NASDAQ has risen by over 40%, Nikkei by around 15%, while China’s A-share index has fallen by about 5% and Hang Seng by about 15%. Judging from the slow growth of M1, both residents and enterprises are still keen on increasing savings. Should the 2024 economic stimulus plan continue to issue consumption vouchers, as done in some cities in 2023, it’s unlikely to reverse the weakening trend of M1, showing no signs of a pulse but rather a flat trajectory, indicating this is still a long-term issue expected to persist for 1-2 years.
When we look back on 2023 and anticipate 2024, the central issue remains in real estate. Where does the balanced price of real estate truly lie? Since the emergence of real estate debt risks, defaults on real estate debt have gradually surfaced in the capital market, with Evergrande’s accumulated debt reaching a scale of one trillion. Currently, major real estate enterprises are facing depleted cash flows, with their main assets tied up in housing inventory. Present regulatory measures primarily focus on stimulating demand by reducing down payments, lowering mortgage rates, easing loan-to-value restrictions, and relaxing purchase limitations. Since October, various regions have successively eased restrictions on real estate prices, yet in November’s data, there’s still a downward trend in both month-on-month and year-on-year real estate prices. The overall situation in real estate is rather intricate, especially considering the limited available data in third-tier cities. From the perspective of Shenzhen’s data, the situation remains severe, with listings of second-hand houses persistently high. With the secondary housing market sluggish, residents might struggle to show interest in buying new or even off-plan properties, leaving overall real estate liquidity and sales receipts still at a low ebb. Thus, the pivotal issue remains: where does the balanced price of real estate truly lie? Presently, real estate prices have been declining for nearly 17 months, yet the number of second-hand listings keeps rising, indicating a fundamental shift in the overall supply-demand relationship. Currently, the pressures from substantial shareholder sell-offs and second-hand property listings exert significant downward pressure on China’s overall asset prices. There’s a reasonable suspicion whether these sellers would channel liquidity into the production sector post-asset sale, representing considerable uncertainty. These assets certainly won’t translate into consumption driving forces. If there’s no inclination to invest in the production sector due to poor long-term prospects, the overall credit cycle will be disrupted. Viewing secondary housing inventory and prices as core growth indicators for the economy, the market currently offers substantial information on this data. Data from several major cities are relatively comprehensive, suggesting that real estate prices will likely continue to face substantial downward pressure over the next six months. Real estate purchase involves long-term borrowing behavior; if the economic outlook is bleak, even with declining real estate prices, there won’t be an increased willingness to buy. If real estate continues a downward trend based on moving averages without reaching a point where residents opt to enter the market, it would signify a highly pessimistic outlook. In terms of regulatory policies, reducing down payments, interest rates, and easing purchase restrictions haven’t had the stimulating effect anticipated. In comparison, allowing for market price fluctuations might be a better alternative.
The real estate prices may have a critical threshold, represented by the initial purchase price P0 at which homebuyers are willing to continue repaying their loans. This is a concern for regulatory bodies hesitant to liberalize prices. Before real estate prices pose risks, any reduction in prices for a development can trigger legal actions by earlier buyers, often becoming a media focus. Even with substantial declines in real estate prices, some consumers are asserting their rights, but their demands are often overshadowed by those advocating for completed construction projects. However, we cannot disregard this aspect. When real estate prices reach a state where the existing price is lower than the loan repayment amount (P0), whether buyers are willing to continue repaying their loans becomes a new issue. In China, buyers might not easily default on loans, but this could create significant public pressure. Determining this P0 price can be estimated: if the down payment is 40%, a price drop to less than sixty percent of the original price would likely trigger this point. Currently, the overall market is at approximately an eighty percent level, not yet extensively reaching this critical threshold, but the secondary market is close, potentially causing continuous selling pressure. For 2024, we anticipate a further six-month decline of about 7% in real estate prices, based on the moving average, still some distance away from reaching the P0 threshold. However, this price level is still insufficient to stimulate widespread desire for property purchase from the buyers’ perspective. Presently, residents are highly cautious about long-term loans.
Regarding real estate prices, there are several questions:
1) Will the overall policy for 2024 involve widespread fiscal purchases of real estate? Currently, it seems that injecting funds through banks won’t salvage real estate prices.
2) After macro-level controls, what will truly restore long-term confidence for residents and businesses?
3) Will the Fed’s expected interest rate cuts starting next year assist in stabilizing financial asset prices to some extent?
Firstly:
The Central Economic Work Conference’s tone for fiscal and monetary policies remains proactive fiscal policies and prudent monetary policies, which have been sustained for three years. Looking back, fiscal policies have been remarkably proactive in implementing policies such as special bond issuances, special refinancing bonds, a comprehensive debt-for-bond swap plan, and additional budgets within the year. The overall toolbox has expanded significantly without any signs of evading debt. There are two main goals for fiscal policy: 1) Infrastructure investment growth; 2) Maintaining tight fiscal expenditures at the local government level. With local government expenditures in a tight balance, the annual obligations are notably high. Given the recent three years’ proactive stance, coping with these obligations has been challenging, necessitating further expansion of fiscal policy tools. In 2024, under the context of maintaining the local government debt’s tight balance, whether fiscal policy still has the capacity to support real estate prices might require the introduction of new tools. If the central government issues special bonds in the name of purchasing real estate assets, the critical point of equilibrium for property prices becomes crucial. If this action occurs prematurely and fails to reach the equilibrium point, it might lead to the entire fiscal policy primarily focusing on fixed assets within real estate. However, fiscal policy comes with costs; shifting entirely to fixed assets could still add pressure on this year’s liquidity, potentially escalating the overall deficit level.
Over the last three years, monetary policy has primarily focused on liquidity support, primarily within the interbank market. M2 growth remains notably high based on current real data. There’s no acute shortage of interbank liquidity; rather, the demand for credit is weak. Monetary policy takes a long time to transmit funds from interbank to the real economy. In the context of monetary control policies in the United States, they adjust the overall market liquidity by adjusting the entire economic interest rate structure, influencing the yield curve by directing it to the bond market. China follows a similar transmission path, but the issuance of corporate bonds and enterprise bonds has decreased significantly. Even with available funds, without demand, stimulating interest rates merely by lowering financing rates is challenging to achieve. This might be a larger issue compared to the United States, indicating whether China’s financial marketization is in place. China predominantly relies on indirect financing, with direct financing serving as a secondary mode. This year, both the Hang Seng Index and domestic capital markets performed poorly, and the path of financing through IPOs in the United States has also been cut off, hindering policy transmission through rate cuts toward IPO financing.
As we look ahead to 2024, the pivotal anchor points for fiscal and monetary policies should revolve around real estate prices. The Central Economic Work Conference articulated the monetary policy objective as “the money supply coincides with economic growth and price expectations.” Incorporating price expectations into the entire monetary policy framework, the most critical price expectation at present remains real estate prices. When the expected decline in real estate prices continues, people won’t leverage to purchase this asset, and it will transmit issues related to real estate debt to the entire economy, leading to credit contraction. In such an environment, stabilizing and increasing the CPI price system becomes challenging. Without a comprehensive price environment, the debt liquidity faced by fiscal policy becomes significantly challenging. We need to consider which indicators can serve as forward-looking indicators for price expectations, such as the quarterly data from the central bank’s household savings survey, which includes residents’ statements regarding real estate expectations, offering some reference value, albeit with a long time cycle. China’s financial market’s implied price expectation targets include pork futures, among others.
Secondly:
Under the relaxed macroeconomic policy, assuming that by June next year, there will be a certain alleviation of debt-related issues in the real estate sector. At this point, society faces a process of expanding production and needs to explore new products and directions. The Central Economic Work Conference laid out industrial technological work for next year, emphasizing the encouragement brought by technological progress in creating new products. The Conference discussed aspects such as artificial intelligence, new energy, and new infrastructure. Apart from technology, institutional factors are crucial. Currently, there is vigorous discussion in the media and academia regarding the development of the private economy. The implementation of previous documents and significant breakthroughs in corporate governance within China’s company system, effectively implementing modern corporate governance systems involving independent directors, shareholders’ meetings, legal representatives, and executive teams, are actively debated topics that need theoretical breakthroughs at the Third Plenary Session, expected to be held in the second half of 2024.
Following institutional factors is whether there’s an increase in the wealth effect for residents. The primary reason for the weakness in China’s capital markets in 2023 comes from credit contraction within the economy. The prerequisite for the revival of capital markets is the appearance of a complete debt resolution plan. At this historical juncture, we may need to contemplate more long-term issues. Over the next five years, China’s GDP growth rate will remain within the range of 4-5%. While maintaining 5% growth in 2024 poses no pressure, sustaining this growth is challenging and requires considerable effort. The most crucial aspect remains the liberation of ideology. We need to review the efforts made since the inception of market-oriented reforms to stimulate action among individuals. A distinct observation is that amidst the current wave of AI, there’s always a list of Chinese names among the founders of renowned companies. The pivotal issue today is fostering an environment for innovation and entrepreneurship. This environment firstly demands open-mindedness, followed by capital markets’ genuine participation in risk investment and reasonable stock market exit methods, and subsequently, corporate governance systems. The greatest confidence in economic growth arises from continuous practice, feedback, and eventual consolidation—not something achievable through mere slogans. A group of exhausted young people might find it challenging to boost the confidence of an entire society.
Young individuals should not be swayed by anxieties regarding education and age; instead, they should continually explore and understand the market. Taking financial enterprises as an example, in just a few years, local government financing vehicles amassed debts of 60 trillion yuan. This debt represents the future for young financial service providers in the industry. Young individuals should focus on companies that can create value, closely monitor financial reports, rather than fixating on the government. This forms a core component of sustained long-term economic growth. If we can maintain the same technological progress as the United States, it can support an economic growth rate of at least two percentage points. The remaining two percentage points come from the advantage of institutional transformation. Hence, there’s considerable confidence in sustaining a 4% economic growth rate in the long term.
Thirdly:
In the recent FOMC meeting, the core discussion between Powell and the press revolved around when to cut interest rates and the assessment of the rate-cutting points. Following three consecutive rate cuts, there was a complete shift in the Federal Reserve’s press release and market expectations. Several questions were raised during the press conference: 1) When asked about the risks of future economic recession versus the potential continued rebound in inflation, Powell noted a balanced risk, indicating that at this juncture, he’s anticipated the risk of economic downturn. This demonstrates Powell’s consideration of the overall economic progress and his indication of the prospect of rate cuts in response to early signs of possible economic decline, something that wasn’t typically signaled in previous press conferences. 2) When questioned about perceptions regarding price stickiness, Powell expressed some concern, particularly as the core PCE remains at a relatively high level. However, he conveyed confidence that the economy has not yet reflected the later impact of higher rates, implying that price stickiness may not be a significant issue. Post the press conference, market institutions deliberated on when and by how much the Fed would cut rates next year. On the whole, the second quarter of next year is viewed as the earliest point for the Fed to commence rate cuts, with an expectation of a median level cut of 75 basis points throughout the year.
Following this indication of rate cuts, global capital markets responded swiftly. The US dollar index saw a significant decline, the Dow Jones and Nasdaq hit new highs, and global capital markets, in essence, followed an upward trend. The release of US dollar liquidity is favorable news for global capital markets next year and benefits China’s capital markets, especially with the potential for Renminbi appreciation, allowing significant space for monetary and fiscal policies.