It is amusing to watch, in the usual dark way, as Chinese authorities butcher their response to the property crash that they themselves triggered (quite rightly, I might add). I am not sure why the attempted rescues are so badly structured but the import of it is that there is no end in sight.
New property sales by land area are now down by 60% year on year and developer spreads are still paralytic. Both are still trending worse:
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Most market observers have sales at -10-20% at worst for this year. Even if we see an H2 recovery of scale, in part owing to easing lockdowns, we are still looking at more like -30-40%.
There are some fiscal offsets, we know. In infrastructure and misplaced tax cuts:
But OMICRON and the property bust both inhibit transmission there as well. Indeed, the GS financial conditions index is still tightening:
Unless or until China scraps the “three red lines” and lets go of “zero COVID”, any recovery in property will be weak and the wider economy substantially held back.
Even relentless China bull, Morgan Stanley, is fading:
PMI has probably bottomed as logistics and production resume gradually, and the Politburo has urged easing on public capex and big tech. Recovery is likely bumpy amid subpar closed-loop production, but risks are less skewed to the downside.
The third arrow in three days, amon gconcerted efforts to stabilize growth and confidence: President Xiheld a Politburo study session on Friday afternoon, immediately after the Politburo meeting (see Light at the End of the Tunnel?) and Central Economic Committee meeting (see Infrastructure Push: Will This Time Be Different?). The session, with a lengthy and balanced accompanying
statement, recognized that “capital is good and important with proper regulation,” and thus China should “enhance its positive role for the economy”. These incremental changes in the context of regulatory reset over the past 18 months are aimed at stabilizing declining private sector confidence, in our view. We expect Beijing could accelerate efforts to wrap up the ongoing regulatory reset on big tech, including data security inspections, social pension arrangements,and overseas listings,giving way to a more stable regulatory stage.
The contraction in manufacturing PMI deepened to 47.4 in April (vs. 49.5in March), the second weakest level since the 2008 GlobalFinancial Crisis (behind February 2020): The underlying details are even worse than the headline:excluding supplier delivery time (a false positive contribution), the weighted average of the remaining four sub-indices declined 4.1, to just 44.7, with major drags from production (down 5.1, to 44.4) and new orders (down 6.2, to 42.6). Reflecting foreign concerns over supply chains,new export orders also weakened to 41.6 (down 5.6). Business expectations (down 2.4, to 53.3) weakened to the lowest level since early 2020 – i.e., lower than the periods of power shortages in 3Q21.
Slump in services, infrastructure pass-through blunted: Service PMI slipped 6.7, to 40 (the second-lowest reading in history) as one-quarter of national GDP is under some form of lockdown; 19 of the 21 sectors were in contraction. Covidsensitive sectors, such as dining and transportation, were in “deep contraction,” per NBS. Meanwhile, construction PMI is not immune to Covid curbs, falling 5.4, to 52.1, marginally above 50.
Still too bullish. Next up, trade shock:
Global recession is coming. The two biggest export economies in the world – Germany (blue) & China (black) – are seeing their new export orders in the manufacturing PMIs fall sharply. That’s deteriorating global demand as we teeter towards recession. Only outlier: the US (red)… pic.twitter.com/u5ntWz7fXa
— Robin Brooks (@RobinBrooksIIF) May 8, 2022
CNY will follow the Chinese property market through the floor.