A leading Chinese investment bank has amplified calls for Beijing to bolster fiscal support to consumers and businesses, citing a relative gulf in effect for pandemic-era stimulative actions taken by China and the United States.
“The US had bigger fiscal expansion during the Covid years. China needs to crank up fiscal support in the near term to break the vicious spiral as weak economic fundamentals and weak confidence are feeding off each other,” said Kevin Liu, a managing director of CICC Research.
“More fiscal support can encourage consumers and the private sector to invest and expand,” he wrote.
Lawmakers will convene in the Chinese capital next week to review the year’s policy agenda and national economic targets.
Both China and the US engaged in monetary loosening during the Covid years, although they are presently in different cycles.
China’s M2 money supply – an aggregate value of a country’s liquid assets, including currency in circulation and private banking deposits – had double-digit growth for most of the last two years, CICC said, but it failed to disperse deflationary threats and jump-start private investment, as much of the money was in credit and loans.
More fiscal support the catalyst to revive China consumption, housing market
More fiscal support the catalyst to revive China consumption, housing market
In contrast, the US’ M2 supply was trimmed by about US$500 billion last year to tame inflation. However, the bank said, its economy still fared better, maintaining strong demand and consolidating its lead over China in terms of economic size.
“In the US, money reached people’s hands, while in China, the money [came] from banks and ultimately flows back to banks,” said the CICC report.
CICC added that much of the 42.6 trillion yuan in new loans disbursed for businesses between 2020 and 2023 did not help spur the country’s economic recovery, as they became deposits or were otherwise used to service old debts.
Credit support, compared to direct fiscal disbursement – which, per CICC, carries “almost zero cost” to revive consumption and investment – was designated as an option which generated additional costs and inefficiencies, as businesses tended toward lukewarm responses.
“In China, credit support becoming bank deposits suggested low investment return and tepid credit demand, and fiscal support remained inadequate,” the bank said.
When the private sector is unwilling or unable to expand, the CICC report estimated, the central government needs an additional leveraging of 5 to 6 trillion yuan in the first half of 2024. The bank said such an approach is necessary to bring up the “fiscal pulse”, a measure of the changing impact of the budget on the economy, to 4 per cent from its current three-year low.
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Several economists and policy advisers have already issued recommendations for direct fiscal backing.
Yao Yang, director of Peking University’s National Development School, has for years suggested direct cash allowances for low-income residents.
“The most effective way to encourage consumption is to issue cash [coupons],” he told Chinese media outlet Yicai.
“A one-dollar cash coupon will multiply to three to five dollars of spending.”
The transactions of new homes in Beijing jumped 38.5 per cent year on year to 6,106 units in December, bringing the total volume of new homes sold across the city to 66,000 units, or 74.9 million square metres. Meanwhile, new home prices rose by 0.17 per cent year on year and the prices of pre-owned homes dropped by 0.63 per cent in the same period.
An increase in new home sales was driven mainly by improved supply, instead of demand, said Chen Wenjing, director of market research at China Index Academy. “Overall, residents are still quite cautious about buying homes, and as the market enters into its off-season in January, sentiment will fall even more,” he said.
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Wang Xingping, senior analyst of companies at Fitch Bohua, a subsidiary of Fitch Ratings, said the growing sales figures were linked to more quality listings entering the market and selling at higher price points, and were in no way indicative of a broad-based recovery in new home prices.
“Unless there is substantial improvement in buyer confidence, we do not think the trend of price increases will continue,” she said.
The pre-owned housing market is faced with even greater headwinds, analysts said, as second-hand homes usually have longer transaction cycles, and the imbalance between supply and demand in the second-hand homes market is more pronounced.
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“Pre-owned homes are already hard to sell,” Chen said. “This, coupled with the fact that expectations of household incomes are still shaky, and homebuyers are hesitant to increase leverage [to buy homes], is putting a dent in demand.”
Gary Ng, a senior economist at French investment bank Natixis, said it takes time for policy support to translate into improved confidence, which, at the moment, is dampened by lower inflation.
“Developers would have greater incentive to sell as quickly as they can, and home prices will most likely flirt with deflation in the next few months,” he said.
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Gao Yueqiu, a manufacturing industry professional living in the eastern coastal province of Shandong, said that she is interested in buying a flat for her daughter who lives and works in Beijing, but is facing many challenges.
“One of the main ones is permanent residency, which grants individuals or households the right to buy a home in a given city,” she said. “In order for someone who was not born in Beijing to buy property in the city, they need to at least have a work residence permit, which is not very easy to get.”
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When asked about the effectiveness of the easing measures, Gao said the rules were “generally positive” for homebuyers and for Beijing’s property market, but she expects prices to keep dropping for a while.
“After all, there is too much inventory, and the population keeps falling … That said, if you put your money in the bank, you’re still losing money. The economy is bad and people have no place to invest their money, so placing your bet on Beijing’s property might not be such a bad idea.”
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“The top priority for the government … in 2024 is the stabilisation of the Chinese economy,” said Alfredo Montufar-Helu, head of the China Center for Economics and Business at the Conference Board, a global non-profit think tank.
“Last year’s Central Economic Work Conference [CEWC] made it clear that the government will maintain a targeted and measured approach towards its stimulus measures to support growth as necessary, but without exacerbating systemic risks.
“With respect to the property sector, the mantra that ‘houses are for living in, not for speculation’ was not included in the official CEWC readout. In our view, this suggests that authorities are likely preparing to implement a range of targeted stimulus measures to help the sector bottom out from its current downturn and stabilise, which we believe is imperative for confidence levels to improve.”
China Index Academy’s Chen said that local governments could roll out more demand-side measures this year, including relaxing purchase restrictions on a “district-specific basis” in China’s first-tier cities, as well as providing subsidies to residents of lower-tier cities to encourage purchases.