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We are unconvinced that recent measures mark a turning point in China’s housing downturn and the resulting banking system is likely to be less profitable, impairing the transmission mechanism of future monetary policy. However, while the real economic impact of China’s property downturn will prolonged, we think ultimately, the authorities should be able to manage the downturn without it triggering a financial crisis.
In this week’s Beyond the Headlines, join Louise Loo, Lead Economist, Macro Forecasting and Analysis, as she discusses if the banking system can rescue the Chinese property sector.
Click here to check out previous Beyond the Headlines episodes.
Hi, I’m Louise Loo, an economist covering China here at Oxford Economics.
Over the last few weeks, we’ve seen more mixed policy signals coming out of Beijing. On the one hand, property easing measures were accelerated, these have been focused on developer financing and the central role of the banking system in extending property-related lending.
On the other hand, we think the December Politburo meeting readout was much more measured in its pro-growth policy tone compared to the July Politburo meeting – with officials pledging to extend fiscal support at an “appropriate pace”.
On balance, these developments add to our conviction that stimulus from hereon will be focused on preventing tail risks, rather than generate an unsustainably high level of growth. We recognise that this view comes against the growing consensus, especially amongst onshore market participants, that China may instead opt for a high growth target again next year to stem the kind of deflationary feedback loop between spot and future economic activity.
On property easing, the upside to recent measures is that we think they could collectively reduce negative headline risk in the near-term, which may in turn support confidence and crowd-in private investors who may have been sitting on the sidelines as the sector struggled to bottom out.
One of the key downside risks that we are monitoring from what is effectively a Chinese-style banking system bailout of the property sector, is the growing contagion risk posed by the smaller, weaker banks. So it is abit of a double whammy for these smaller banks. They’re pushed to take on more risky property assets on their balance sheets, AND they’re also roped into the ongoing restructuring of local government financing vehicles. All of that will feed through in lower interest margins, uncompetitive maturity extensions of risky loans, and deferred principal repayments.
So conceivably, capital injections into weaker parts of the banking system may ultimately be warranted to ringfence any spillovers onto other parts of the economy.
Overtime, the resulting banking system is likely to be less profitable and less well-capitalised, impairing the transmission mechanism of future monetary policy. Given that the Chinese banking system is a key countercyclical policy lever, the ability to weather future economic downturns may also be more impaired.
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