Citi: China property to correct for three years

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Following at recent trip to Beijing, Citi analysts have concluded:

  • China’s self-sustained growth rate is currently 6.5-7.0% – This becomes the new normal as the impetus from external demand and the property boom is fading. Therefore, policy support is needed to achieve the growth target of 7.5%. The government still has to rely on infrastructure investment to offset the impact of the property market correction. So far, targeted easing has been used, but broad-based loosening (such as RRR and rate cuts) may be needed late this year or next year. Policy support can only temporarily mitigate the slowdown. The process of setting the 2015 growth target has not started yet, but there are increasing calls to lower the target to around 7%.
  • Monetary policy takes the bulk of the burden – In 1H, monetary easing was targeted toward SMEs, agriculture and social housing. Going forward, there could be targeted easing for infrastructure. One option being considered is cutting the RRR by 50bps for bigger banks, with the released funding devoted to infrastructure (e.g., railways). Alternatively, PBOC re-lending may be used to support infrastructure.
  • Fiscal support is likely limited – The MOF has been conservative and is not willing to increase the deficit. So far this year fiscal spending has been front loaded but the overall envelope remains unchanged. The government has accumulatedabout Rmb4tn in fiscal deposits that can potentially be used to support spending. (Comment: this may not be feasible since tapping these deposits would increase the deficit, according to standard fiscal accounting.)
  • Property correction may drive capacity reduction – The central government is not in a rush to introduce nationwide policy to interrupt the market correction. The correction may last for three years, forcing capacity reduction.

It will indeed drive capacity reduction, in steel and iron ore.

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About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.