Zhu Haibin: Stabilizing the property market requires stabilizing housing prices and sales. It is recommended to speed up the adjustment of real estate policies.
The economy as a whole got off to a good start in the first quarter
21st Century: What do you think of China's first-quarter economic data? How is China's current economic performance?
Zhu Haibin: Judging from the macro data in the first quarter, it can be said that the economy has started well. The economy grew by 5.3% year-on-year in the first quarter, laying a good foundation for achieving the full-year target of about 5%.
Specifically, the economy in the first quarter showed the following characteristics:
First, the monthly data fluctuated significantly. Economic data in February exceeded expectations, while the data in March dropped significantly.
Second, the strength in the first quarter mainly came from industrial production. The added value of the industry increased by 6% year-on-year, and the added value of the service industry increased by 5% year-on-year. Both performed well, but industrial performance was better. Exports were strong in the first quarter. Advanced manufacturing, including the information industry, new energy, and green industries, developed rapidly. Large-scale equipment updates drove manufacturing investment to increase by nearly 10% year-on-year in the first quarter. These are important factors supporting the strong start of the industry.
Third, the recovery of consumption was within the normal range and did not exceed expectations. In the first quarter, total retail sales of consumer goods increased by 4.7% year-on-year. Considering the Spring Festival holiday, the overall performance was satisfactory.
There are also concerns about economic performance in the first quarter. At present, real estate is still in a downward channel, with real estate transaction volumes and housing prices still declining. Real estate remains a major obstacle to economic recovery. Additionally, the price ratio was low in the first quarter, especially as the PPI continued to shrink, and the GDP deflator was about -1.1%. The downward pressure has increased compared with the previous two quarters.
Price factors drive export competitiveness improvement
21st Century: China's exports in the first quarter were better than expected, and the WTO raised its forecast for global trade in goods growth. How do you view China’s current export situation? What are the future export prospects?
Zhu Haibin: In the first quarter, exports denominated in US dollars increased by 1.5% year-on-year, and the growth rate of export volume was much higher than the growth rate of export value. For instance, the export volume from January to February increased by 7% year-on-year, with the export value increasing by about 20% year-on-year, and the export price falling by about 13% year-on-year. Roughly estimated, export volume in the first quarter increased by nearly 15% year-on-year, and export performance was very strong.
Several factors contributed to the strong exports:
First, the global economic performance in the first quarter, including the United States and Europe, exceeded expectations, and global terminal demand is improving. According to JPMorgan Chase’s estimates, the global economy’s annualized growth rate in the first quarter may exceed 3%, better than the 2.6% annualized growth rate in the fourth quarter of last year.
Second, China's export prices have fallen sharply, significantly increasing its export competitiveness. Recently, major developed countries in Europe and the United States have faced high interest rates, high inflation, and high wage growth, leading to increased production costs. Meanwhile, China's falling export prices further amplified product competitiveness, promoting a significant increase in export volume.
Third, China’s strategy of strengthening export diversity and decentralization has achieved certain results. Before 2017, China's exports to Europe, the United States, and Japan accounted for 40%. In 2023, this proportion fell to about 33%. The share of exports to emerging markets, such as ASEAN, has increased by 3-4 percentage points, and the share of exports to "One Belt and One Road" countries, Africa, Latin America, and Russia is also rising.
Fourth, China’s export products are becoming increasingly mid- to high-end. The export proportion of the "three new items" that have been much discussed in recent years, such as solar cells, lithium batteries, and new energy vehicles, was only about 1% in 2017 and will rise to 6.5% in 2023.
Exports denominated in U.S. dollars are expected to grow by about 3% year-on-year this year, roughly in line with the WTO's expectation of global trade growth of 3%. China's export market share in the global market is expected to remain roughly the same.
Judging from global economic performance, the annualized growth rate in the first quarter exceeded 3%, but it may fall back to about 2% in the third and fourth quarters, weakening the external demand environment in the second half of the year. Recently, countries including Europe, the United States, Latin America, and other regions have launched anti-dumping, countervailing, and other investigations into Chinese exports, posing certain challenges to China’s exports to these markets. It is necessary to actively deal with potential trade disputes.
The key to stabilizing the property market is to stabilize housing price expectations
21st Century: China's real estate investment and sales are still declining year-on-year in the first quarter. How do you view the current operation of China's real estate market? How can the real estate market be better stabilized?
Zhu Haibin: The downward speed and duration of the real estate market have exceeded market expectations, and the real estate data in the first quarter is still worrying. In the first quarter, new home sales fell by nearly 28% year-on-year, and the completed housing area fell by about 20% year-on-year. House prices have continued to fall in recent months, indicating that the current real estate market is still relatively difficult.
To stabilize the real estate market, two indicators should be focused on:
The first is housing prices. For many potential home buyers, if the downward trend in house prices continues, their rational choice is to wait and see. Therefore, short-term housing demand may be significantly lower than normal levels, prolonging the downward trend of the real estate market.
The second is new home sales data. If the data continues to decline, it will impact developers' liquidity. Recently, the data has fallen beyond the normal range, and the funds withdrawn by real estate companies have subsequently declined. Some real estate companies are facing unexpected financial difficulties, further impacting the market. Therefore, the key to stabilizing the property market is to stabilize housing price expectations and sales.
I have two policy suggestions:
First, strengthen policies to stabilize the property market. In the past year, real estate policies have been continuously fine-tuned, including reducing down payment ratios, lowering mortgage interest rates, and relaxing purchase restriction policies in some cities. However, these policies continue the principle of "one city, one policy," and the gradual and small relaxation rhythm is similar to "squeezing toothpaste." The policy effect is not obvious in the short term and may further narrow policy space. It is recommended to speed up the adjustment of real estate policies and consider completely canceling purchase restrictions. The era of real estate as an investment tool has passed. Even if purchase restrictions are completely lifted in first-tier cities, it is unlikely that housing prices will rebound significantly. Even if housing prices in some cities, like first-tier cities with demonstration signals, rebound, this will positively affect stabilizing current market sentiment.
Second, the “three major projects” (social housing, urban village renovation, and “both emergency and leisure” public infrastructure construction) are a good starting point. The current real estate market is experiencing both a cyclical and structural decline. Overall supply exceeds demand, but there is a structural mismatch problem. The demand for new housing among middle and high-income groups is relatively stable, and new urbanization, such as the urbanization of migrant workers, still has huge housing demand. Therefore, the supply of affordable housing and rental housing should be increased. In the medium to long term, multi-channel and multi-subject supply is an inevitable trend. On one hand, we must speed up the policy adjustment of the commercial housing market and promote its stabilization. On the other hand, the policy level should increase support for affordable and rental housing. The government can focus on acquiring unfinished or undeveloped land and converting it into affordable or rental housing, which can speed up destocking and alleviate downward pressure on real estate investment.
Form a stable and predictable service industry investment environment
21st Century: How do you view the current consumption recovery situation? Service consumption is relatively strong, but commodity consumption is relatively weak. What is the main reason behind this? What policy suggestions are there for promoting consumption?
Zhu Haibin: The service industry grew by 5% in the first quarter, which was weak compared to the industrial growth rate of 6%. Since the outbreak of the epidemic in 2020, the proportion of the service industry in GDP has been declining. This contrasts with the decade from 2010 to 2020, when the growth rate of the service industry was higher than the overall GDP growth rate, and the service industry’s proportion of GDP continued to rise.
The decline in the service industry’s proportion of GDP is due to the impact of the epidemic on some service industries and the tightening of regulatory policies or changes in industrial policies in some service industries, slowing their growth or even causing contraction.
To develop new productive forces and promote medium- to long-term sustained and stable growth, innovation and upgrading are needed in both the manufacturing and service industries. The service industry’s innovation and upgrading involve not only technological breakthroughs but also business model innovations, which are crucial for improving total factor productivity. Currently, policies are somewhat tilted toward the manufacturing industry, with relatively less support for the service industry. It is recommended to adjust industrial policies for the service industry to form a stable and predictable environment, stabilizing medium- and long-term investment in the service industry. Additionally, accelerating the high-level opening of the service industry to the outside world and encouraging its innovation and upgrading during opening up is essential.
The economic growth rate for the whole year is expected to be “high at first and then low”
21st Century: Recently, Asian currencies such as the Japanese yen and the Korean won have experienced a depreciation trend, and there is also certain depreciation pressure on the RMB. How do you view the subsequent trend of the RMB exchange rate?
Zhu Haibin: There is some depreciation pressure on the RMB in the short term, but this is not an isolated case. The Japanese yen is facing greater depreciation pressure, and Southeast Asian currencies are also depreciating. These are more affected by the US dollar. Recently, U.S. inflation has continued to exceed expectations, and market expectations for the pace of interest rate cuts by the Federal Reserve have undergone major adjustments. Initially, it was generally expected that interest rates would be cut 6-7 times this year, but now it has been reduced to 1-2 times. Recently, the U.S. ten-year Treasury bond interest rate has risen again, strengthening the U.S. dollar. This is the main reason for the depreciation of Asian currencies.
For China, economic growth was relatively good in the first quarter, and macroeconomic fundamentals performed well. It is expected that the RMB will most likely fluctuate slightly within the range of 7.2-7.3 during the year, and the RMB exchange rate is expected to remain relatively stable.
21st Century: What is the expected economic trend throughout the year? How to respond to macro policies?
Zhu Haibin: We expect full-year economic growth to be 5.2%. With certain efforts, the full-year growth target of around 5% can be achieved.
Our forecast for China's economy is more from a quarter-on-quarter perspective. In the first quarter, the economy grew by 1.6% quarter-on-quarter, equivalent to an annualized growth rate of more than 6.5%. It is expected that the quarter-on-quarter growth rate in the second half of the year will fall back to about 1%, equivalent to an annualized growth rate of around 4%, leading to a trend of “high at first and then low” throughout the year.
In terms of fiscal policy, it is expected that the policy measures identified in the government work report will be implemented, including the issuance of 1 trillion super-long-term special government bonds and 3.9 trillion local special bonds. The possibility of additional policies during the year is low. In terms of monetary policy, it is expected that there will be two 10-basis point interest rate cuts during the year and another reserve requirement ratio cut in the second half of the year. Additionally, there is the possibility of intensifying structural monetary policies, such as mortgage supplementary loan (PSL) financial support for the "three major projects."
Source: 21st Century Business Herald
