China’s efforts to reduce financial vulnerabilities continue with measures against speculation in real estate, commodities, crypto and overall credit growth.
With the most pronounced vulnerabilities globally across corporates, households and banks, China’s ability to deleverage will determine its success in transitioning to a more moderate, but stable, growth trajectory.
Yet house prices are still rising in most cities, the stock market is returning to the February highs, and the fate of majority state-owned-owned Huarong Asset Management is still unclear. Consequently, China’s financial risks will remain elevated for the foreseeable future.
China’s financial vulnerabilities remain at the fore. Efforts to eliminate speculation from commodity and housing markets are increasing, necessary debt restructuring is accelerating, and overall leveraging is being reined in, with net new lending grinding to a halt. Central bank officials are also debating how currency policy can offset imported inflation. Successful measures will dampen China’s investment dynamics and headline GDP growth. But given that China has some of the most pronounced financial vulnerabilities in the world, particularly within corporates, households and banks, reducing them should ensure a more stable growth outlook and a better allocation of capital (Chart 1).
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Summary
- China’s efforts to reduce financial vulnerabilities continue with measures against speculation in real estate, commodities, crypto and overall credit growth.
- With the most pronounced vulnerabilities globally across corporates, households and banks, China’s ability to deleverage will determine its success in transitioning to a more moderate, but stable, growth trajectory.
- Yet house prices are still rising in most cities, the stock market is returning to the February highs, and the fate of majority state-owned-owned Huarong Asset Management is still unclear. Consequently, China’s financial risks will remain elevated for the foreseeable future.
China’s financial vulnerabilities remain at the fore. Efforts to eliminate speculation from commodity and housing markets are increasing, necessary debt restructuring is accelerating, and overall leveraging is being reined in, with net new lending grinding to a halt. Central bank officials are also debating how currency policy can offset imported inflation. Successful measures will dampen China’s investment dynamics and headline GDP growth. But given that China has some of the most pronounced financial vulnerabilities in the world, particularly within corporates, households and banks, reducing them should ensure a more stable growth outlook and a better allocation of capital (Chart 1).
Real Estate Prices Continue to Climb
An eight-month high in property price growth in April suggests recent efforts to curb the housing market have some way to run. The 0.48% MoM gain (primary market, simple average of the 70-city data) is the highest since the 0.56% in August last year and pushed the YoY rate to 4.45%. Gains were broad based, with 65 out of the 70 cities recording positive monthly gains. Chongqing was the fastest at 1.4%. Price growth in Beijing, Shanghai, Shenzhen and Guangzhou – once far above the countrywide average – remains moderate. However, the same cannot be said for the secondary market, with all four above, or close to, double-digit gains.
Authorities have imposed limits on mortgage lending and the share of lending to developers. This follows last year’s three red lines policy – intended to trigger deleveraging among real estate developers. Some cities have also seen other measures tighten, such as those related to the hukou permit system.
Discussions about introducing a property tax have resurfaced, but any implementation remains some way off. Higher mortgage rates are therefore a more immediate way to cool the housing market. And in contrast to unchanged policy rates, banks are raising mortgage rates, with both Shenzhen and Hangzhou home borrowers seeing rates rise this month. Availability of mortgage loans is also expected to drop as the rules over both banks’ property lending and developers’ leverage start to bite.
Debt Restructuring Outlook Remains Unclear for State-Backed Enterprises
Several defaults by state-backed borrowers in recent quarters also leave lingering uncertainties over implicit government guarantees. The fate of MoF-owned China Huarong Asset Management and its $22bn in USD-denominated debt will be a key test for government support. Possible debt restructuring remains unclear following the delay to its 2020 results in April. Recent debts have nevertheless been repaid, and a new president has been approved to replace the now-executed former chairman.
China’s Financial Markets Shrug Risks, for Now
The Huarong debacle has yet to impact China’s financial markets. The company’s Hong-Kong listed shares have been suspended since April, bond prices have collapsed and CDS has spiked. But for the sovereign, the currency is currently trading at its strongest level in three years, with the combination of high real yields, a stepped-up vaccination rollout and an ongoing recovery all helping. And in contrast to higher rates globally, yields on Chinese government bonds are also the lowest since September at around 3.07%. Spreads to US Treasuries have tightened by around 75bps this year (to around 150bps this week), versus less than 20bps for the rest of the region (Chart 3). Chinese equities, too, have largely shrugged off the news, with the CSI300 up around 4% since 1 April and now climbing back towards the February high. China’s five-year CDS saw a brief spike in April to the highest since October, and has trended higher YTD. But it remains comfortably below levels a year ago (Chart 4).
While China’s recent financial market performance has been favourable, the vast financial vulnerabilities leave significant economic and market risks. Huarong’s systemic importance means the clean-up will determine investor perceptions over ongoing state guarantees and future allocation of capital. Housing market policies will also be crucial for economic stability, as will broad equity market stability to some extent. And overall, reduced financial risks are a key part of the transition to a more balanced, and stable, medium-term growth dynamic.
Caroline Grady is Head of Emerging Markets Research at Macro Hive. Formerly, she was a Senior EM Economist at Deutsche Bank and a Leader Writer at the Financial Times.
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)