China: This is not what a hard landing looks like
A stabilizing housing market, continuing infrastructure investment, and signs of a steadier household sector point to a soft landing in China.
Dec 17, 2012 | Related Links Index Hidden Parent
Despite compelling evidence of a return to stability, onshore and offshore equity markets seem to think a hard landing is still likely, with the Shanghai A share market trading at its lowest valuation ever, lower even than in 2008–09 (measured by trailing price-to-book). Activity in a number of areas supports our view that a soft landing is a more likely outcome.
A stabilizing housing market
Housing in China is stabilizing, yet markets are still basing their negative expectations for the economy on a severe real estate bubble collapse. Housing has admittedly lost steam since 2011, but momentum has turned positive recently. Residential prices and home sales are on the rise, while data from housing-related areas such as cement and steel production are far from suggesting a freefall. It’s also important to note that these improvements have happened without any direct fiscal or monetary help.
Housing in China is stabilizing, yet markets are still basing their negative expectations for the economy on a severe real estate bubble collapse. Housing has admittedly lost steam since 2011, but momentum has turned positive recently. Residential prices and home sales are on the rise, while data from housing-related areas such as cement and steel production are far from suggesting a freefall. It’s also important to note that these improvements have happened without any direct fiscal or monetary help.
Investments in infrastructure are supporting the growth outlook
Announcements of several infrastructure projects totaling RMB
1 trillion, and the urgency with which these policies were communicated, indicate that the government is ready to use fiscal policy to support economic growth.1 Infrastructure investment growth is already being seen, while recent improvements in bank credit suggest that more spending in this area is under way.2
Announcements of several infrastructure projects totaling RMB
1 trillion, and the urgency with which these policies were communicated, indicate that the government is ready to use fiscal policy to support economic growth.1 Infrastructure investment growth is already being seen, while recent improvements in bank credit suggest that more spending in this area is under way.2
Although further investment in infrastructure won’t help the ongoing imbalance between investment and consumption, it will support the medium-term growth outlook. There is still room to lower interest rates to stimulate growth, although the authorities are likely to move slowly. On balance, fiscal and monetary policies won’t ease as aggressively as they have previously, though we believe the easing that will take place will be sufficient to stabilize growth at around 7%.
Global manufacturing sentiment should improve
With the housing market stabilizing, the manufacturing slowdown is being presented as “new evidence” to support the case for a hard landing. However, China’s recent manufacturing slowdown was largely triggered by weakness in Europe, not by domestic forces. A closer look at the data shows that the services sector has performed better than manufacturing, and within manufacturing, it is export-related industries—not housing-related sectors—that showed greater declines.
With the housing market stabilizing, the manufacturing slowdown is being presented as “new evidence” to support the case for a hard landing. However, China’s recent manufacturing slowdown was largely triggered by weakness in Europe, not by domestic forces. A closer look at the data shows that the services sector has performed better than manufacturing, and within manufacturing, it is export-related industries—not housing-related sectors—that showed greater declines.
A steadier household sector
Stabilization is also apparent in the household sector. Aside from the pickup in housing demand, retail sales growth has steadied, thanks to improved auto sales. Signs of solid growth in the labor market are good indicators that household activity is not declining sharply—due in part to strong service sector hiring, which helped offset the weakness in manufacturing-related employment. Consumer spending is by no means strong, but here, too, activity is forming a bottom.
Stabilization is also apparent in the household sector. Aside from the pickup in housing demand, retail sales growth has steadied, thanks to improved auto sales. Signs of solid growth in the labor market are good indicators that household activity is not declining sharply—due in part to strong service sector hiring, which helped offset the weakness in manufacturing-related employment. Consumer spending is by no means strong, but here, too, activity is forming a bottom.
A bold policy agenda
Although structural impediments are pulling China’s trend growth gradually lower, the policy agenda for the new generation of leaders is likely to be bold, especially within the areas of labor, product and financial markets.3 A new leadership is realizing that previous reform dividends have been largely exhausted, and new supply-side reforms are needed over and above the current
"band-aid” of fiscal and monetary stimulus.
Although structural impediments are pulling China’s trend growth gradually lower, the policy agenda for the new generation of leaders is likely to be bold, especially within the areas of labor, product and financial markets.3 A new leadership is realizing that previous reform dividends have been largely exhausted, and new supply-side reforms are needed over and above the current
"band-aid” of fiscal and monetary stimulus.
In our view, this divergence between markets and the real economy will likely narrow over the next year or so, as it becomes clearer that a soft landing may be more likely than a hard landing.
We invite you to contact us to learn more and a J.P. Morgan representative will be in touch with you.