Chinese policymakers last week announced a raft of measures to support the economy ahead of the National Day holidays, which started on Monday. These measures are designed to boost credit growth, support the equity and property markets, and boost personal consumption more directly.
Before these announcements Chinese equities had underperformed their global counterparts by a factor of 50%-60% and had performed only slightly better relative to other emerging markets. New building starts shrunk to about 70-million square metres from just under 200-million in 2022, as the property sector continued its painful correction. These moves came after a period of economic malaise that started in the property sector just before Covid-19 and was worsened by harsh lockdowns as the pandemic took hold.
China has struggled to shrug off the meltdown in its economy from overcapacity in its housing market. I first wrote about the problems brewing in the Chinese housing market in September 2021. At the time, the second-largest Chinese property developer, Evergrande, had defaulted on its debt after the authorities put in place measures to cool the overheated sector. Most developers, big and small, have since experienced the same thing as the sector imploded, taking animal spirits in China with it.
As the property sector has collapsed, Chinese consumers, for whom property is the primary savings vehicle, have suffered negative wealth effects. Those who derived an income from the industry, which was estimated to be a quarter of economic activity at its height, have seen their incomes collapse. Consumer demand has failed to recover as balance sheets weaken and deflationary forces take hold.
As I wrote in 2021, the collapse of Evergrande was also bad news for the global economy. The dearth of Chinese demand has become a huge problem for global growth. The IMF now forecasts global growth will settle at about 3.1% over the long term. This compares with a pre-Covid average of 3.8%. The downward revision in long-term global growth expectations is linked to the fall in Chinese growth, which is now expected to drift to about 4% a year from somewhere north of 10% for the decade before 2008. The absence of the Chinese growth engine has been keenly felt in the rest of the world.
For countries such as SA that export minerals used in construction, China has been an important client. The grim outlook for that country’s construction activity has therefore had a negative effect on the prices and volumes demanded of the minerals we export, and has weighed down currencies and growth. To the extent that the measures put forth by the politburo support expectations for Chinese demand, they will support SA’s balance of payments.
It is not yet clear that what the politburo has put in place so far will sustainably revive real economic activity. However, markets may take comfort in the willingness of Chinese leaders to take bolder steps to support that economy, which suggest they will do the proverbial “whatever it takes” to prevent further weakness. The rand is likely to be a prime beneficiary of this policy largesse. Base metal prices moved higher in the past week and the rand has strengthened in response.
The SA Reserve Bank decision to cut the repo rate by 25 basis points (bps) last month was counter to what some in the market expected. The monetary policy committee (MPC) has a far more benign inflation outlook compared with July projections but still maintained the pace of cuts suggested at that meeting. The decision by the Federal Reserve to cut by 50bps made more aggressive cuts in SA possible, but the ever-cautious MPC did not take it.
The stimulus announced by Chinese authorities could precipitate a positive balance of payment shock and thus a stronger local currency. If the rand strengthens further, the inflation path will improve and the MPC’s decision to cut by 25bps instead of 50 will be called into question even more.
• Lijane is global markets strategist at Standard Bank CIB.
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