China has been taking steps to boost its struggling economy, including introducing measures to tackle its ongoing real estate slowdown. Haining Zha, Vice President and Director at TD Asset Management, speaks with Kim Parlee about China’s economic woes and the implications for investors.
Kim Parlee: There are growing concerns about the state of China’s economy and the ability of policymakers there to fix some of the underlying challenges that have emerged. Top of the list, a property market downturn that could ensnarl some of the country’s biggest developers, slowing economic growth and rising unemployment amongst young people.
Here to explain what all this means from an investing standpoint, Haining Zha, vice president and director at TD Asset Management.
The property concerns not, probably, as concerning as they were just until we got some recent news, which we’ll talk about. But maybe you could just start by taking us through what you see some of the main reasons are, that China is experiencing a slowdown.
Haining Zha: Right. There is a very old Chinese saying that three feet of ice is not a result of one day cold. It applies perfectly in this case. So what we are seeing right now is actually three years of continuous shock from the pandemic. So many businesses closed their doors. Many people lost their jobs. They need time to heal.
And on top of that, in the real estate sector, things have been happening. Slowdown and deleveraging has been in the works for many, many years, which is a very strong headwind.
And moreover, the external goods demand from the advanced economies, they are in a slump. So that doesn’t help, either. That’s why the reopening process in China has been disappointing so far.
Kim Parlee: I want to, if we could, just dig into some of those. Country Garden, if people have been watching headlines, is a name that they might be familiar with. It’s one of the largest property developers in China. It’s been in crisis mode, but it did not default, which I think people are watching quite closely. Is that positive, or is that just delaying the negative?
Haining Zha: It’s a bit of both. They avoided the worst outcome, but I don’t think- it’s probably too early to say they are turning the corner. So they paid about a $22 million interest payment to avoid default. But that’s right after they further deferred their debt payment, their onshore debt payment for another three years. But looking forward to the next 12 months, they still have $15 billion worth of debt maturing in the next 12 months, which could weigh on the company and the whole sector as well.
Kim Parlee: And if something was to happen, I mean, how big of an implication could it be?
Haining Zha: Of course, that will further dampen investor sentiment. And basically, people will go into crisis mode again.
Kim Parlee: Yeah. Now, you say that the government has made some efforts, I know, to try and stimulate the economy and keep things moving. They haven’t done enough. And I know you want to talk about monetary policy, fiscal policy, and, again, the real estate sector. So let’s start with monetary policy. What are we seeing, and what are we not seeing enough of, in your opinion?
Haining Zha: Right, right. In the last four months, the Chinese central bank cut reverse repo rate and medium-term lending facility rate twice. By total, about 20-25 basis points. So, according to the monetary policy transmission mechanism, it will naturally spread to the loan prime rate, which is the rate directly linked to the corporate borrowings and also the mortgage loans.
But this time around, according to the last LPR release, only the one-year loan prime rate was cut by 10 basis points. But the five-year bucket still remains unchanged. And in people’s eyes, that is not enough monetary policy stimulus.
That happens for a reason, because the Chinese government wants to keep the banking sector profit. Because banking plays a very important role helping the government keep a very steady credit growth. So the government wants to protect that.
But unfortunately, in other parts of the world, whenever monetary policy works, a big part of that is working through communication and signaling channel. But in this case, with the lack of strong forward guidance, the monetary policy is simply less effective.
Kim Parlee: Do you see that changing or no?
Haining Zha: When circumstances further press them, they probably will do the change. But at this time, at this point, it is more in reactive mode.
Kim Parlee: Yeah. Got it.
The fiscal policy, also, you’re seeing that they’re falling short on that front, too.
Haining Zha: Yeah. Actually, recently, there haven’t been a lot of news on the fiscal front. People have been whispering about the 1 trillion RMB worth of special treasury issuance to finance the spending. That didn’t happen. And also, some investors are hoping the government can dole out more money directly to consumers to support the consumption. Well, so far, investors have been disappointed.
The only real change recently that happened is the local government financed vehicle debt swap. So basically, it will be consolidated into the provincial government debt. From there, they actually can save about 1% interest rate on the debt load, but that’s far from enough.
Kim Parlee: Hmm. And not really enough to really boost confidence overall, is it?
Haining Zha: No. Because for many provincial governments, their debt load is actually already very high. So it’s far from confidence-boosting.
Kim Parlee: OK. And then sticking with the confidence side, the real estate side of things, you touched on it, I mean, in terms of Country Garden (OTCPK:CTRYF, OTCPK:CTRYY). We deferred a big problem. Where do you see this? How do you see this playing out?
Haining Zha: Right. In the real estate area, there are many, many policy changes. Because as we mentioned before, real estate is one of the most difficult area within the economy right now. So there are a couple of policy changes.
Number one, the government- most of the purchase restrictions have been removed, especially for lower-tier cities. And number two, the government changed the way they categorized the first-time home buyers, essentially making more people qualified as first-time home buyers. And number three, for the any new purchase, they lowered the down payment and the mortgage financing rate.
And lastly, and most importantly, in my opinion, the most meaningful is, they lowered the mortgage rate on existing mortgage stocks. So, on average, that’s about 50 basis change. So if you count, do the math on 40 trillion RMB worth of mortgage balance, that amounts to a savings of about 200 billion a year for the consumer that they can use for additional consumption.
Kim Parlee: So, it makes the housing market more accessible, I guess, for people in terms of what they need to get into the market. I know another concern for you, though, is just, obviously, the job market for people who are younger who want to buy the real estate probably at the same time. It’s hard to buy anything if you don’t have any income coming in.
Haining Zha: Exactly. So right now, the state of the labor market, with people struggling to find employment and struggling to grow their income, for the average middle class, it’s a little bit out of their reach to buy a new home.
Kim Parlee: Hmm. And another issue- and I know something the government has done in the past- and I was asking you what it is. It’s something called the stamp duty. What is the stamp duty, and what did they do before, and what are they doing now?
Haining Zha: Right. Stamp duty is basically a tax every time you buy and sell stocks. Fundamentally speaking, it has minimal influence on the whole economic growth. But in the last 20 years also, there were four occasions where the government cut the stamp duty tax, and every time, the stock market got excited, particularly in 2008. The stock market rallied up 10%. It limbered up the next day.
But this time around, when they reduced the stamp duty tax, the next day, the market opened up 5% and only traded down all the way to close up 1%. For anyone that pays attention to technical patterns, clearly, that’s a very bearish pattern.
Kim Parlee: And then to add one more thing in there, because it sounds like- not that there’s not enough from everything we just talked about. But you’ve got the Taiwanese elections coming up, too. I mean, a lot of people are not focused on that. Maybe tell me what we should be listening for. What’s material, from your standpoint?
Haining Zha: Right, right. The Taiwan election will be in January 2024. Right now, based on the situation on the ground, it looks like the pro-independence DPP probably has a high likelihood of winning the election. When that happens, of course, the geopolitical escalation might further intensify and further dampen the investor sentiment.
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