CHIR - With Its Economic Challenges Mostly Behind It China Sets Its Sights On A Modest Recovery
2023-03-15 16:23:00 ET
Summary
- Why China's growth target this year is so modest?
- Has China completely dealt with the challenges of 2022?
- Why China's real estate sector still remains a risk?
China is targeting 5% growth for 2023, its lowest in decades. Haining Zha, Portfolio Manager at TD Asset Management, tells Greg Bonnell, Beijing is looking to move on from last year’s stiff pandemic protocols and tepid economic activity with a more balanced recovery.
Print Transcript
Greg Bonnell: China's closely watched the National People's Congress has come to a close as the world's second largest economy plots its growth path for the near future. Joining us now with some of the big takeaways, Haining Zha, Portfolio Manager with TD Asset Management. Haining, always great to have you on the program.
Haining Zha: Thanks for having me.
Greg Bonnell: All right. So let's start with the National People's Congress. What did you take away from the event?
Haining Zha: First, just to give you a bit of background, National People's Congress is probably one of the most prominent annual political events in China, and it typically attracts a lot of attention from the market. The reason why is that it is a great window to observe the general direction of the economic policy and other government policy in general. And typically during the National People's Congress, the government released a set of numerical targets which reflects their goal for the rest of the year.
One of the most watched one is, of course, the GDP target, and this year it was set at 5%. It seems to be in normal range, but is actually very conservative in nature. The reason why is last year we have a very low base. The realized GDP growth is only 3%. And if you look at the different large institution survey or estimate, they all range somewhere between 5% to 6%, so 5% is really on the very low end of the range. And the reason for that is the government probably want to focus more on the quality instead of quantity.
Now, other than the GDP growth target, there are also other targets -- for example, the employment target. So this year, the government aimed to create 12 million new jobs, and they want to keep the urban unemployment rate at roughly 5.5%. The numbers didn't change a lot compared to last year, but it's still important because in the current environment, if China wants to recover its GDP growth, the biggest driver is going to be from consumption. If people wanted to consume, first they need to have their job and income back, so it is still very, very important.
The third target is, of course, the inflation target. The government wants inflation to stay under 3%. In the current environment, the current CPI year over year is only 2.1%, so it's not going to be a constraining factor for the near future. Of course, there are other type of targets, but generally, they remain stable on a year over year basis. And we don't see it moving the market a lot. We, as an investor, actually need to focus on something more concrete in our investment decision making.
Greg Bonnell: Now, heading into this year, obviously, when we saw those COVID restrictions lift pretty quickly in China, there was a lot of excitement around an economic boom out of that reopening. You mentioned that 5% is a pretty conservative number when we're talking about China's economy. Was there some thinking, too, that perhaps monetary policy or fiscal policy was going to step in in China to try to boost growth, which just isn't happening?
Haining Zha: Yeah, that's actually one of the biggest focuses coming into the National People's Congress. So just to break it down, first of all, in terms of fiscal policy, basically, our main takeaway is there won't be any large fiscal stimulus program. So if you look at the government budget plan -- the budget deficit, it is only at 3% of GDP, which is slightly more expansionary compared to last year's 2.8%. But there is two problems with the official headline budget deficit number. The first one is it includes a lot of the adjustment and it carry over, so it might not reflect the true economic reality. So if we do the right adjustment, we can see that this year they are budgeting actually for 4.4% deficit. Compared to last year, it was actually 4.7%, so it is actually in terms of fiscal -- that impulse, it actually turning on the negative side a little bit.
And the second thing about the headline budget deficit is that it is a very narrowly defined measure. For example, it doesn't include the local government fund, which is a main source of funding for local government operations. So if we do the adjustment and include that, we can see that last year's number is actually around 7.4, and this year is going to be 7.5, again, only slightly expansionary. So our main takeaway is there won't be any large fiscal stimulus, and probably for a reason because the government, particularly the local government, after the COVID lockdown, they are in relatively bad shape, and they need time to heal. So at this point, considering the fiscal sustainability, it's probably not a good idea to do a large fiscal stimulus program.
And in terms of monetary policy, similar to fiscal policy, we don't expect large monetary stimulus, either. So remember, at the end of last year, the language from the government is that the stable monetary policy needs to be more forceful. They need more forceful execution. But turn into this year, in the MPC statement, the statement change to the stable monetary policy needs to be more targeted and accurate. So that is one thing. The second thing is if you look at the actual effect on the real economy, the average mortgage rates compared to last year, at the end of last year, it has already come down to 150 basis points. And the average corporate lending rate has already come down about 60 basis points.
So at this point, there is no point doing a large interest rate cut or anything. At least, it's not urgent. But we do see on the reserve requirement ratio side, the government can do a little bit more because the overall credit growth is still going to be strong. It will be commensurated with the nominal GDP growth, plus a spread. So cutting the reserve requirement ratio is basically a reduction of the tax on the banking system.
Greg Bonnell: You talked about local government funding, the need for local governments to have some time to heal out of the lockdowns. What role does the real estate sector play in all that? Because obviously that's been a point of concern in China.
Haining Zha: Right. Actually, one finer detail we notice in the budget is that if you look at the entry of local government revenue, it's only budgeted to increase by 0.4%, which is as very slight increase. And that item actually tend to very high correlation with the land sales the real estate sector. So this is just another way of saying that the government expects the real estate activity, at least on the new construction side, to be pretty weak, roughly flat. It is still an improvement compared to last year's big down about 20%. But nonetheless, it's not something to be excited about from investment point of view.
Greg Bonnell: I want to ask you if there's any context as to what happened with Silicon Valley Bank, which obviously is sort of a singular issue for Silicon Valley Bank, but it did get investors in North America concerned about the financial system. Obviously, it got the Fed concerned enough to step in with some extraordinary measures over the past couple of days. Is there a read-through to China's banking sector at all?
Haining Zha: Right. So our read on the whole situation is automatically the financial condition will tighten everywhere else. So from Fed's point of view, if the tightening of the financial condition already there, then it's kind of doing the work for them. So for Fed, they probably have additional motivation to wait for things to settle down and then to move forward. But the thing is that right now the labor market condition is still pretty tight, so they probably don't want to easily give up on hiking the rate and basically tame the inflation.
As to its impact on the two financial institutions elsewhere, particularly on the Chinese banks, I think it's actually arguing for better diversification impact in this kind of environment because China is actually in a very different monetary cycle. While the rest of the world is doing the tightening, China is actually doing easing. Although the easing magnitude is probably less than what people expected, nonetheless it is still a pretty good diversification.
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With Its Economic Challenges Mostly Behind It, China Sets Its Sights On A Modest Recovery