Why weaker growth and market fears might delay, but won’t derail, China’s reform push

China’s economy is still growing fast enough to give policymakers cover to continue with reforms, but some adaptation may well be necessary
The pace and breadth of reforms is weighing on market sentiment, possibly forcing a rebalancing between long-term goals and short-term stability

Chaoping Zhu

Published: 2:30pm, 22 Oct 2021

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The past quarter was the weakest for the Chinese economy since the country started recovering from the Covid-19 shock. Real GDP increased by just 0.2 per cent on a quarterly basis during the third quarter, compared with a growth rate of 1.2 per cent in the second quarter.

However, the recent slowdown might not stop China from achieving its 6 per cent growth goal for 2021 – in the first half of the year, the economy saw strong year-on-year GDP growth of 12.7 per cent.

This will allow policymakers to continue with structural reforms in various fields. However, the mounting growth pressure might mean a need to rebalance between long-term reform goals and short-term economic and social stability.

Since July, China has accelerated the pace of fundamental reforms. The implementation of decarbonisation policies, reducing the education burden on students, internet regulation and escalating property market controls have grabbed many headlines and are weighing on market sentiment.

Admittedly, these measures are aimed at improving the country’s long-term growth potential in terms of environmental sustainability, population growth, technological progress and financial risk control.

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In the short term, any one of these policies, on its own, might only affect certain areas of the economy, meaning the overall impact would be moderate. However, when so many profound policies are introduced over a short period, the compounded economic pressures are no longer negligible.

That probably explains the sluggish September economic data, which reflected weakness in domestic demand.

Investment is a major area currently subject to policy pressure. A key feature of recent property market controls is an increased tightening in development and mortgage loans, which targets speculative activities and leverage risks.

This has proved to be an effective measure to cool the national housing market. Real estate investment declined by 3.5 per cent year on year in September, according to estimates based on data from the National Bureau of Statistics.

Compared to investment, consumption is usually seen as a more stable marker in the economy. Some people are concerned about their future income with several sectors under near-term policy pressure, which has dampened overall consumer sentiment.

In the People’s Bank of China’s (PBOC) quarterly survey of depositors, the confidence index for future income dropped to 49.5 in the third quarter from 51.0 in the previous two quarters. This suggests more respondents expect to receive less income and that consumption growth might remain weak without supportive measures.

While Chinese policymakers remain committed to long-term reforms, they are also practical and flexible when dealing with short-term growth risks. The policy pendulum is now swinging back towards accommodative short-term policies while the direction for long-term reforms remains the same.

After cutting the reserve requirement ratio for banks by 50 basis points in early July, the PBOC is now shifting to a neutral stance in real estate credits. The central bank has called for greater support for qualified developers and homebuyers. First-time homebuyers might benefit from the favourable policies, and developers could also breathe easier as liquidity conditions improve.

That said, we should not take this as a sign of property market stimulus. Purchase restrictions and price regulations will stay in place to prevent the market from overheating, particularly in Tier 1 cities with high property prices.

Another area for policy support is government financing. Local government bonds have been issued at a faster pace since August, so local investment could rebound around the end of the year and in the first quarter of 2022. Economic activities are likely to pick up in the last quarter of this year, supported by a rise in liquidity.

For long-term reforms, new policies and guidelines might be introduced at a more gradual pace and with more clarity. This is critical to maintain short-term stability as well as establish the confidence needed to achieve China’s long-term goals.

Chaoping Zhu is a Shanghai-based global market strategist at JP Morgan Asset Management

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