China's economy is still facing greater downward pressure in the short term, especially to be wary of a hard landing in the real estate market. A hard landing in the real estate market poses a limited threat to the financial system, but it hits the real economy hard. At the same time, it is necessary to improve the supply elasticity of upstream industries and related products as soon as possible, alleviate the upward trend of commodity prices, and reduce unnecessary administrative intervention in the supply of some commodities
Text | Zhang Bin Zhu He
China's GDP growth in the third quarter was 4.9% year-on-year, significantly lower than the potential GDP growth rate.
China's economy is still facing greater downward pressure in the short term, especially the need to be vigilant is the hard landing of the real estate market. A hard landing in the real estate market poses a limited threat to the financial system, but it is a serious blow to the real economy, and a hard landing in real estate is equivalent to a hard landing for China's economy.
Supply constraints and weak demand
The economic operation in the third quarter was under pressure from both supply and demand. The main contradictions on the supply side are the tight supply of coal power and the restriction of production of some industrial products, which restricts the economic recovery. The problem on the demand side is more prominent, and the weak consumption, investment decline, and exports are not as good as the data appear. The result is a combination of supply and demand, with lower levels of output and not low prices.
Since the epidemic, the recovery of consumption has not been optimistic. Retail sales of consumer goods in September increased by 4.4% year-on-year. As a representative of consumer durables, the year-on-year growth rate of car sales continued to decline, falling to -17.3% in September. The shortage of chips has had a negative impact on automobile production and sales, and the decline in terminal demand also has great explanation. There are many reasons why consumption is difficult to pick up, the zero-tolerance prevention and control policy of the epidemic still restricts the consumption of many services, and the slow pace of employment and income recovery of low- and middle-income groups also restricts consumption growth.
The pressure on investment to fall back is even greater. In the first three quarters, the cumulative growth rate of total fixed asset investment was 7.3% year-on-year, down sharply from the cumulative growth rate of 12.6% in the first half of the year. Among the three major investments, infrastructure investment has always remained sluggish, and the growth rate of fixed asset investment in real estate has dropped significantly year-on-year. Manufacturing investment benefited from strong export performance in the previous period, but continuity remains to be seen. Infrastructure investment is facing greater pressure, local platform companies affiliated with local governments are the leading force in the current infrastructure, the disposal of debt problems and land sales revenue of local financing platforms have restricted infrastructure investment, and it is difficult to really support infrastructure investment only by accelerating budgetary expenditures and special debt. Real estate investment has shown good resilience since the epidemic to the first half of this year, and has fallen sharply after the second half of the year.
Exports are not as optimistic as the data suggests. The year-on-year growth rate of exports in September reached 28.1%. The high growth rate of exports is largely due to price increases driven by rising costs. The growth rate of export amount is decomposed into three parts: the growth rate of export quantity, the growth rate of export unit price year-on-year and the growth rate of export quantity * the year-on-year growth rate of export unit price. After splitting and calculation, since July 2021, the pulling effect of the number of export products on exports has suddenly and rapidly declined, and the price increase of export products is the most important factor driving the year-on-year growth rate of export amounts. More than 60% of the export growth in July and August 2021 came from price effects. Under the cost-driven export growth, the profits of export enterprises have not improved, and the profit growth rate of the manufacturing industry in the month of August was only 6% year-on-year.
There is a risk of a hard landing in the real estate market
Real estate has a significant cyclical character, and after experiencing the industry boom in the previous two years, the next cooling is also natural. However, coupled with the regulatory policies on the finance and financial institutions of housing enterprises and the impact of the epidemic, the real estate industry is facing unprecedented pressure after entering the second half of 2021, and the risk of hard landing has emerged.
In the second half of 2021, the indicators of the real estate market fell sharply. In the third quarter, the sales of commercial housing increased by -12.5% year-on-year, and the new construction increased by -17.4% year-on-year. The sharp decline in real estate sales is mainly due to two reasons. First, support for residents' home loans has declined. In the third quarter of 2021, the new medium- and long-term loans of residents decreased by 510 billion yuan compared with the same period last year, which is the largest continuous contraction since 2018. Home mortgage rates have also risen. In September 2021, the average interest rate of the first home loan nationwide was 5.46%, up 23 basis points from the end of last year; the average interest rate of the second home loan was 5.83%, up 29 basis points from the end of last year. Second, affected by the Evergrande incident, consumers are worried that other real estate companies will also have similar evergrande dilemmas, worried about discounts in house prices, and worried about not being able to deliver houses on schedule.
The liquidity of real estate enterprises is extremely tight. Under the high turnover model, real estate enterprises are highly dependent on sales collection, and the sudden decline in sales has brought huge cash flow pressure to real estate enterprises. Under the influence of the Evergrande incident, domestic financial institutions have become more cautious about lending to real estate enterprises. Financing in overseas markets for real estate companies has encountered greater problems. Chinese real estate companies have suffered a panic sell-off in the overseas dollar bond market. Not only did Evergrande's bond prices plummet, but the prices of overseas bonds of most Chinese real estate companies fell sharply after the National Day. Panic has formed in the overseas market, there is no distinction between high-quality and inferior housing enterprises, as long as there are bonds that are about to mature, no matter what statements the company makes, the market is still worried that it will be difficult to repay the debt.
If faced with a hard landing on real estate, China's situation may not necessarily cause systemic damage to the financial system as developed countries, and then spread to the real economy. Due to differences in national conditions, the hard landing of China's real estate market may be limited to the existing assets of the financial system, but considering the huge scale of China's real estate industry and its close relationship with land finance, it will have a broader impact on incremental credit growth and the damage to the real economy more directly.
This is an amplified negative feedback mechanism. The sharp decline in real estate sales has brought about a high degree of liquidity tension for housing enterprises, followed by a decline in local government land revenue and upstream and downstream related enterprises (from cement, rebar to decoration home appliances), a decline in credit to residents, enterprises and government credit, an increase in bankrupt enterprises, an increase in credit risk premiums, a decline in credit credit in the whole society and a decline in total income, which will further exacerbate the decline in house prices and the decline in real estate sales revenue.
Prevent hard landings
Prevent hard landings in the real estate industry. The starting point is to prevent the liquidity crisis of housing enterprises, and the foothold is to ensure the cash flow of housing enterprises. The cash flow of real estate enterprises mainly comes from sales revenue, and the real estate mortgage policy has a significant impact on real estate sales revenue. First, it is necessary to relax the limit on the amount of housing mortgage policy in a timely manner, adhere to the principle of "implementing policies according to the city", and meet the housing mortgage needs of residents more according to commercial principles, so that real estate can restore its self-hematopoietic function. The second is to support the borrowing of new debts of real estate enterprises to repay the old. The third is the emergency rescue loan for real estate companies that have been doing well in the past but have suddenly fallen into liquidity difficulties, and the interest rate of the loan does not have to be preferential, but the number is enough to help the enterprise cope with the crisis. The third is to postpone the introduction of other policies that have a great impact on the real estate market in the near future. There is widespread concern that the real estate tax will be introduced in the near future, which will once again have a serious negative impact on real estate sales in the near future. Real estate taxes are a long-term solution that needs to be done and should be done, but a more reasonable time needs to be found.
Boost the growth rate of social financing in the whole society and enrich the cash flow of other industries and departments. In order to prevent the downward transmission of the real estate market to other industries and sectors, to prevent the ever-enlarging negative feedback mechanism, and to boost the overall vitality of the current economy, the main measures are needed: 1, the reduction of interest rates, which on the one hand reduces the debt cost expenditure of the enterprise and residential sectors, on the other hand, it helps to improve the valuation of the assets they hold, strengthen the balance sheets of enterprises and residents and the ability to cope with negative shocks. 2. Increase public sector debt to support infrastructure construction investment. The advantage of this is on the one hand to make up for the drag on infrastructure investment caused by the decline in local government land revenues; on the other hand, it is also a rare opportunity to get rid of excessive dependence on land finance.
The supply elasticity of upstream industries and related products should be improved as soon as possible to alleviate the upward trend of commodity prices. Reduce unnecessary administrative intervention in the supply of some commodities, and let the commodity market return to the market-oriented pricing mechanism as soon as possible. At the same time, the import restrictions on some upstream products will be moderately relaxed, and the current upward pressure on the prices of bulk commodities will be alleviated by market-oriented means.
(The author Zhang Bin is a researcher at the Institute of World Economics and Politics of the Chinese Academy of Social Sciences, a senior researcher of the China Finance Forty Forum; Zhu He is the deputy director of the Research Department of the China Finance Forty Forum; Editor: Wang Yanchun)