From ANZ FX:
We spent last week in China (Beijing and Shanghai) seeing a range of banks, investors, commodity houses, government agencies, commentators, analysts, and journalists.
Housing.
Any discussions about financial markets and Chinese deleveraging constantly gravitated towards housing. It’s certainly what onshore participants want to discuss when it comes to China’s markets and it’s definitely what offshore investors want to discuss. Unfortunately we didn’t find many takers of the ‘it’s totally fine’ sort. The most favourable view was that the first tier cities of Beijing, Shanghai, and Shenzhen were likely to see good long-term housing market demand, and that hukou reform would add to underlying urban demand over time…There isn’t an aggregate over-building problem, though there is a mismatch between some of the construction in recent years (for middle class investors) and what is actually needed (lower end housing).
This year’s 7.5% growth target appears to have become a firmer target as the year has gone on. Certainly the weakness in the data through Q2 2014 after last year’s credit rationing is viewed as having driven this hardening. This also suggests little tolerance at this stage for significant negative short-term side-effects from reform.
…While there was little visibility on the 2015 growth target, one issue on which there was uniform agreement was that it would be very difficult to aim for a 7.5% growth target again next year. It was also a uniform view that the ambitious third plenum reforms had been downgraded, and if delivered, were likely to take substantially longer than initially perceived.
Deleveraging.
We haven’t taken a trip to China previously where the financial system has been such a significant topic of discussion. A range of views were proffered, and unfortunately only a few of them positive. One view was quite cynical concerning the idea that recent reforms such as allowing some local governments to issue bonds and allowing insurance companies to open banks will have any meaningful macro impact if the authorities continue to target the level of leverage in the economy. Certainly these reforms could imply a better allocation of capital if new credit is allocated on commercial terms. But if the broader economy has an over-leverage problem, and that is the policy target, then new borrowing in some sectors must necessarily be broadly offset by reduced borrowing elsewhere.
Bottom line.
For financial markets we have been framing our China analysis with deleveraging at its core. We found little reason to shift us off that approach. While our visit threw up a range of uncertainties, what seems clear is that the authorities seem committed to restraining the growth of credit relative to the expansion of recent years.
