Unfortunately, our cautious Chinese 2015 growth forecast of 6.5% seems to be on track and it could even undershoot. House prices are still declining, and no end is in sight despite the government having decided to introduce incentives for house buyers. Additional risk arises from the fact that China today is among those emerging markets with the highest private-sector debt levels and there have even been some corporate defaults. As a reaction to the economy losing steam, the People’s Bank of China (PBoC) seems set to continue its loose monetary policy.
The renminbi should thus remain weak against the dollar. Despite all this, capital account liberalisation reforms are likely to continue. Chinese equities have soared since mid-2014 with the Shanghai Composite index up by around 120% on year-ago levels. This improved equity performance comes despite further evidence of a slowing economy. GDP in Q1 slowed to 7.0% year-on-year, down from 7.3% in the previous quarter and is the lowest rate of growth since Q1 2009.
Moreover, seasonally adjusted growth in this period came in at just 1.3% (an annualized rate of 5.3%). Other activity data confirms the economic slowdown, with industrial production rising by just 7.1% year-on-year in Q1 after double-digit increases over most of the past two years. Falling house prices are a drag on construction …
In our view, the primary reason for weakness in the economy is a slump in the property sector, with house prices across 70 cities declining by 6.1% year-on-year in April. Weakness is most pronounced in smaller cities, with third-tier city prices declining by 6.4%, while first tier cities declined by 4.1%. The PBoC, together with local and central governments, have taken steps to boost the housing market. These include lowering the down-payment required to purchase properties and reducing mortgage rates.
These steps may have had some positive impact as the pace of decline in month-on-month terms has moderated. However, it is our belief that such benefits will prove short-lived due to excess supply in the Chinese property sector. We have previously estimated that the residential construction sector faces several years of excess capacity due to existing inventory levels, excess property under construction and vacant apartments held by investors
