China’s property market remains the biggest downside risk to its economic growth target this year, with policymakers seemingly not in a hurry to make significant changes because its impact is mostly confined to the world’s second-largest economy, according to the chief economist for a global ratings agency.
“China has the savings to deal with this. It’s not really spilling over too much to the rest of the world,” said Paul Gruenwald, global chief economist at S&P Global Ratings.
“So they’re not going to be forced into dealing with the property excesses by any external or market pressure. They can do it at their own time, but we are not at the bottom yet.”
In May, China unveiled wide-ranging measures to stabilise its property sector, which has been in contraction since the debt default by Evergrande Group in 2021, but analysts believe bolder steps are still required to turn the tide.
Average prices for new homes across 100 cities rose by just 0.11 per cent in August from July, slowing from the previous month’s 0.13 per cent rise, according to property researcher China Index Academy.
China, by design, is not very dependent on the rest of the world for financing
Paul Gruenwald, S&P Global Ratings
And despite China’s growing influence in trade globally, the impact of its local government debt woes and property crisis are still very much isolated from the rest of the world largely because of its investment-heavy development model that counts on state capital, Gruenwald said.
“China, by design, is not very dependent on the rest of the world for financing,” he said.
“The fact that it is a kind of closed system means they can probably deal with it internally rather than being forced externally to deal with it, which is how a lot of countries have got into trouble.”
But running an economy that has significant high savings and low consumption relative to its gross domestic product also comes with a caveat.
China’s private consumption to GDP ratio has hovered around 40 per cent compared to roughly 60 per cent in its peer group of countries and has moved little over the years, Gruenwald said.
“The authorities seem to have used the same toolkit to stimulate the economy, which is investment,” said Gruenwald, who worked at the International Monetary Fund for nearly 16 years focusing on Asia.
“It’s been very difficult to dislodge the high savings rate. If China were to have a bigger consumption boost in its economy and be structured a bit differently, some of these surpluses that are causing problems would at least partially go away. And that would be a better outcome.”
In June, S&P Global Ratings raised its forecast for China’s GDP growth in 2024 from 4.6 per cent to 4.8 per cent, lower than Beijing’s target of “around 5 per cent”.
“I don’t get too excited about [the upgrade], and I think we agree with the view that the property sector obviously is a big challenge for China,” Gruenwald said.
The forecast also highlighted supply chain adjustments and trade conflicts with the country’s major trading partners – the United States and the European Union – as being among the external risks.
And even though China has sought to boost trade with developing countries, it would be difficult to replace the loss of trade with advanced economies, Gruenwald said.
Meanwhile, Gruenwald believes the competition in replacing fossil fuels with alternative sources would introduce new players that could change the dynamics in power and influence in global energy transition that is critical for economic growth in the next decades.
We have had these spats before between the US and Japan a couple of decades ago when they were managed to be worked out
Paul Gruenwald, S&P Global Ratings
“China has moved up a lot in the value chain, and I think that causes a little bit of attention by itself,’ Gruenwald said.
“I would argue they’re on the frontier now for batteries, electric vehicles and some other products.
“We have had these spats before between the US and Japan a couple of decades ago when they were managed to be worked out. Maybe they get it worked out a different way for China.”
Gruenwald also said the US Federal Reserve would likely cut its benchmark borrowing rates next week, with one more cut expected later this year.
The scale of the cuts are likely to be 25 basis points each time for about nine times in the next 18 months, bringing down interest rates from 5.25 per cent to 3 per cent, in a soft landing scenario for the US economy, Gruenwald added.
Emerging economies, such as China, are also likely to follow the US central bank to reduce interest rates, Gruenwald added, as easing monetary policy could affect depreciation on their currencies, exacerbating capital outflows due to large interest rate differentials with the world’s largest economy.