China - Some positive signals, but headwinds remain firm

This is part of the Global Monthly, see here.

After weak July data, macro data for August were a bit better. Retail sales re-accelerated, the unemployment ratio came down a bit and the stepping up of support was visible in a pick-up in infrastructure investment. Still, the data also showed that headwinds from strict Covid-19 policy and real estate problems remain firm, with property sales and investment still in the doldrums. We think the rebound from the lockdown slump in March/April will bring above trend qoq growth in 2H-22, particularly in Q3, with the stepping up of support gradually filtering through. That said, the drags from Covid-19/real estate and the slowdown in global demand will make this post-lockdown rebound a much less spectacular one than that of 2020.

Retail sales show some improvement, but property sector data are still ugly

Given Beijing’s adherence to strict Covid-19 policy in the run-up to the CCP Summit in October (see below), pandemic flare-ups with new variants led to new regional lockdowns over the summer months. Still, the nationwide lockdown intensity has remained below last spring’s levels, when megacity Shanghai was in a lockdown for five weeks or so. Also, measures have been taken to mitigate the impact of lockdowns on production and transport, while local governments have been told to put more emphasis on safeguarding growth while containing the pandemic. However, the rolling lockdowns are leaving a clear mark on consumer confidence and demand (the recent recovery in retail sales is largely due to special measures boosting car sales), and added to the property sector downturn, visible for instance in still lacklustre property sales and investment data. Growing distrust in developers’ capacity to finish construction projects even resulted in a mortgage boycott. For the property sector to stabilize, it will prove crucial that support measures taken (like cutting the benchmark rate for mortgages, supporting financing for healthy developers and increasing leeway for local governments to support real estate) will help finalizing current construction projects, restoring trust in the sector and mitigating systemic risks from rising defaults.

A prelude to the 20th CCP Congress in October

From 16 October, the CCP’s 20th National Congress will be held in Beijing. A key outcome of this summit, held every five years, is the selection of party members into policy committees. In 2018, presidential term limits were abolished; this now looks to pave the way for a third term for President Xi Jinping. After the summit, we see more room for a gradual exit from ‘Zero-Covid’, or at least a more pragmatic approach, which was also recently advocated by China’s Centre for Disease Control and Prevention. It is also crucial how other key policies will evolve under Xi’s third term: how will the government move in the trade-off between mitigating systemic risk from real estate versus reducing moral hazard and capping leverage, how much focus will Beijing keep putting at strategic concepts such as common prosperity and dual circulation, will the crackdown on internet companies continue and – last but not least – how will China position itself in foreign economic and geopolitical affairs. We will cover these and other questions in our regular and/or special China publications going forward.