MNI INTERVIEW:Support Needed To Boost Future China GDP-Advisor

The Chinese economy will need further accommodative policy to maintain a potential growth rate between 5.5-6% over the next 10 years, while recent house-buying relaxations will help the country recover, with GDP tipped to reach around 5.3% this year, a policy advisor told MNI in an interview.

Zhang Ming, senior fellow and deputy director at the Institute of Finance and Banking at Chinese Academy of Social Science, said Chinese authorities will have to provide further monetary or fiscal support, which will likely target consumption, investment and bail out property developers.

Chinese authorities have targeted a 5% GDP rise for 2023 and Zhang’s previous estimate placed economic growth at 5.5%.

He believes some economic indicators will rebound following the implementation of property stimulus, which will signal the economic bottom. M1, which gauges company deposits and cash, is expected to rise over 5% y/y from its 2.3% recorded in Aug, as corporations increase production and investment, while PMI will likely rise over 50 after languishing below the contractionary handle for the past five months, Zhang noted. The Consumer Confidence Index, issued by National Bureau of Statistics, will also rise, he predicted.

YUAN REBOUND

Recent regulatory moves have boosted property and equity markets and this will improve sentiment, alongside the gradual recovery of economic fundamentals, he added. The yuan will likely rebound to CNY7.0-7.10 against the U.S. dollar before the year’s end, despite current volatility due to a strong U.S dollar. While the USD Index will likely peak soon, Zhang did not expect a sharp jump in CNY as the index and yields of long-term U.S treasuries remain high. In addition, China may also cut interest rates further, he explained.

The People’s Bank of China has sent strong signals to curb CNY weakness via restarting the counter-cyclical factor for a stronger-than-expected daily fixing and cutting the FX reserve requirement ratio, the economist said. Zhang noted the PBOC may favour financial market stability over boosting exports with a weaker yuan at present, as the depreciation could drag down equity prices and increase capital outflow.

PROPERTY BOOST

China’s recent relaxed house-buying rules will largely impact tier-one and some tier-two city markets that previously experienced strict purchasing controls, Zhang noted. He added moves to relax regulation were timely and would help developers suffering from liquidity issues. Increased sales will aid developers’ solvency as bank appetite for the sector recovers, Zhang added.

While consumer sentiment will rebound alongside the property-sector recovery, real-estate investments may take time to recoup losses following a 15-month decline, and property will never act as a strong economic driver again as the supply-demand structure of the sector has changed thanks to an oversupply in tier three and tier four cities, Zhang argued.

He said regulators should rescue major developers, protect house buyers and creditors, and prevent spillover effects. He called on authorities to relax bans against developers refinancing via equity and bonds, and to allow them to increase their credit lines.

LPR CUT EYED

Zhang suggested authorities should implement further support via fiscal and monetary channels to ensure a sustainable recovery on top of recent stimulus. Real interest rates continue to rise amid weakened PPI, which adds pressure on credit demand. “Therefore, a large-scale policy rate cut, such as a 50bp reduction to the loan prime rate, is necessary,” Zhang said.

However, the PBOC may hesitate to cut rates as this will expand the interest-rate spread between China and the U.S., and worsen capital outflow, while monetary easing may have limited impact without a more positive fiscal stance, Zhang said. The central government should issue as much as CNY1 trillion of special treasuries to provide consumers with coupons, which could boost spending between 4-10 times, he suggested. The fiscal authorities could also front load part of the 2024 local government special bond quotas this year to boost investment.

Zhang expects authorities to reveal concrete long-term reforms during the third Plenum of the 20th CPC Central Committee in November, a meeting held every five years and often used to launch significant economic policy or political reform. He expects decisions on further opening, SOE reform, private sector encouragement and a united domestic market.