Goldman Sachs On China Developments

The US bank weighs in on the LNY tourism backdrop, the recent CPI print and the housing market backdrop.

Goldman Sachs: "Strong Lunar New Year (LNY) tourism data: During the Feb 10-17 LNY holiday, the government reported 474mn person-trips and RMB 633bn tourism spending, jumping 34.3% yoy and 47.3% yoy, respectively. Compared to 2019, the number of visits is 19% higher and the amount of spending increased 7.7%. These are strong numbers, partially reflecting the pent-up demand for family gathering during the first normal LNY since Covid (China had zero-Covid policy in 2020-2022 and many people were sick in January 2023 amid the "exit wave"). That said, the robust LNY tourism data are encouraging for our 6% real household consumption growth forecast for 2024.

Inflation miss, credit beat: January inflation and credit data were released in early February. CPI inflation came in lower than expected (-0.8% yoy vs. Bloomberg consensus -0.5%). Although LNY-related seasonal distortion plays a role in the weakness, this is the fourth consecutive negative CPI inflation print. On the other hand, credit data surprised to the upside, with total social financing (TSF) new flows reaching an all-time high of RMB 6.5tn in January. The details of the data show the strength comes from medium-to-long term corporate loans, suggesting infrastructure and manufacturing investment is still the key lever for the government to support the economy. Within infrastructure and manufacturing investment, technology, green investment and digitalization are likely to receive outsized support as suggested by the PBOC Q4 Monetary Policy Report.

Housing bottom not in sight: In our latest research comparing the current Chinese housing downturn with the US 2007-09 subprime crisis, we estimate that real house prices nationwide declined 16% from 2021Q3 to 2023Q3, which is around half of the peak-to-trough decline in the US experience. Although there are many fundamental differences between the two countries' housing markets, we argue that, once started, a housing downcycle tends to last for years and policy efforts to prevent negative spillovers - foreclosures and financial stresses in the US case and developer defaults and local government spending cuts in China's case - are crucial."