Chinese property still accounts for 25% of GDP
Why a Trump victory could undermine China's domestic consumption. Chinese central bank can expand its balance sheet with new liquidity tool.
Our briefing on key economic and financial developments in China as of Friday, 1 November, 2024:
Chinese property sector accounts for around 25% of GDP, making recovery of the real estate market imperative to economic growth.
Wu Ge fears that a Trump victory will have a negative impact on China’s domestic consumption as well as exports due to exchange rate effects of heightened tariffs.
The Chinese central bank paves the way for swelling its balance sheet with its new short-term liquidity adjustment tool.
Chinese property accounts for 25% of national GDP- Renmin U. professor says recovery of the real estate market is the key to rescuing China's economy
A leading Chinese economics professor says ambitious fiscal stimulus policies are bound to flounder, unless top policymakers can succeed in driving a recovery of the country's ailing property market.
Liao Cun (廖群), a senior researcher at China's prestigious Renmin University and chief economist at Sino Group, estimates that the property sector continues to account for around 25% of Chinese national GDP.
“If the output approach is used, official data indicates that real estate made a direct contribution to GDP of 10.2% in 2023," Liao writes.
Liao further points out that the "Real Estate Industry Chain In-depth Report" (房地产产业链深度研究报告) released in 2020 estimated that indirect impact of the Chinese property sector accounted for another 10 - 20 percentage points of national GDP, including the wealth effects of homeownership on consumption.
"On this basis, given comprehensive consideration of direct and indirect impacts, it's not an overestimate to say that the real estate sector's overall contribution to China's GDP is around 25%," Liao writes.
For this reason, Liao believes the 8% drop in China's real estate market this year has eroded GDP by two percentage points, severely undermining Beijing's target of achieving 5% economic growth this year.
"If the real estate market hadn't fallen but instead achieved zero growth, then GDP growth would be at 6.8%, far higher than the annual growth target of 5%," Liao points out.
The State Council and the Politburo signalled the launch of ambitious monetary and fiscal stimulus measures at the end of September, which helped to drive a sharp spike in China's A-share market.
Given the decisive importance of the property market to the Chinese economy, however, Liao believes these measures will be to no avail unless they can achieve a sustained recovery in real estate prices.
"The large-scale decline the real estate market has created marked weakness in consumption and led to a major weakening of fixed investment - it's the key source of pressure on China's economic growth at present," Liao writes.
"Consequently, a recovery and stabilisation of the real estate market can jolt the whole system, driving a dual rebound in consumption and fixed asset investment.”
Fear over Trump victory's impact on China’s domestic consumption
A leading Chinese economist has highlighted the adverse impacts of a second Trump presidential victory for both domestic consumption and exports.
Wu Ge (伍戈), chief economist at Changjiang Securities, expects a Trump victory to be worse for China than the election of the incumbent vice-president Kamala Harris.
"If Trump is elected, I predict that our foreign trade will face even greater shocks," Wu writes.
Wu points out that the recent raft of tariff and anti-dumping measures passed by the Biden administration have already put a major dent in China's exports to America.
The more aggressively protectionist temperament of a Trump administration could even further hamper China's export growth.
This would have severe ramifications for China's economy, given exports have been its chief bright spot in 2024, amidst an ailing property market, faltering consumption and lacklustre investment.
"Exports to the US as a share of China's total exports have fallen from 20% at the last round of trade frictions to around 15%," Wu writes. "If US tariffs rise to 30 - 60%, we forecast that this will put a 4 - 8% drag on China's overall export growth."
Wu says the negative implications of a more aggressively protectionist Trump administration could extend well beyond just exports.
He forecasts that it could also undermine domestic consumption - the perennial weak spot of the Chinese economy, due to the effects on exchange rates and Beijing's ability to make domestic monetary policy adjustments.
"US tariffs will help to drive a strong US dollar, because of improvements to its trade balance and corresponding depreciation of the currencies of countries hit by tariffs.
"If this happens, it could cause major constraints for China's efforts to vigorously reduce interest rates and expand domestic consumption."
Why the Chinese central bank's new liquidity tool could blow up its balance sheet by mainstreaming monetary policy
The People's Bank of China (PBOC) - which is the Chinese central bank - recently made the surprise announcement that it would add a new instrument to its existing kit of open market operations (OMO) tools for the execution of monetary policy.
On 28 October, PBOC said it would commence the use of outright reverse repos with primary dealers for terms of up to a year, with accepted collateral to include financial bonds and corporate grade bonds, in addition to Chinese treasuries and local government bonds.
The move adds to the diverse range of OMO instruments already employed by PBOC to achieve its monetary policy ends.
Chief amongst them are the seven-day reverse repo and the one-year medium-term lending facility (MLF), both of which are forms of collateralized lending by the Chinese central bank to designated counter-parties.
Domestic observers say the introduction of the outright reverse repo gives greater flexibility and nuance to PBOC's control of financial system liquidity, by adding a greater range of maturities - including three and six-month terms - to its toolkit of lending channels.
Wen Bin (温彬), chief economist with China MInsheng Bank, says the introduction of the outright reverse repo also serves the broader goal of bringing Chinese monetary policy more in line with international practices, by emphasising the use of short-term interest rates as the key means of influencing long-term interest rates.
PBOC governor Pan Gongsheng (潘功胜) flagged great efforts to achieve this shift earlier in the year. At the 15th Lujiazui Forum held in Shanghai on 19 June, Pan said PBOC's monetary policy framework would "gradually diminish its focus on quantitative targets," and instead "consider confirming the use of certain short-term rates of the central bank as the main policy rates."
PBOC currently has two main policy rates derived from its key open market instruments - the rate for its seven-day reverse repo and the rate for its one-year MLF.
Wen Bin believes the launch of the outright reverse repo will advance Pan's goal of putting greater emphasis on the influence of the short-term rate, by reducing the significance of the MLF in PBOC's open market operations.
"The move will further weaken the MLF rate as a policy rate," Wen writes.
"As of October 2024, China had a total of 6.79 trillion yuan in outstanding MLF, for a decline of 480 billion yuan compared to July.
"They still account for around 18% of the base money supply balance, however, and the rates inevitably have a guiding role on other interest rates.
"It's necessary to reduce the scale of [MLF] money creation to reduce its influence." Wen points out that from November to December 2.9 trillion yuan in MLF are set to expire, accounting for 42.7% of the outstanding balance.
Expanding PBOC's balance sheet
In addition to reducing the role of MLF and increasing the role of short-term policy rates, the launch of outright reverse repos by PBOC could also increase the scale of the central bank's balance sheet.
This is because unlike the seven-day reverse repo or the MLF, the outright reverse repo will involve the full transfer of security ownership from borrowers to the Chinese central bank.
This will put debt assets on PBOC's balance sheet, and well as give it the right to any interest revenue while the outright reverse repos remain in effect.