(Yicai) Nov. 13 — Morgan Stanley is cautiously optimistic for the performance of China’s economy next year, as the ongoing recovery in the world’s second-largest economy depends on new policy support, according to the chief economist of the Chinese arm of the US financial services firm.
China is shifting economic growth drivers, with real estate and older sectors still accounting for a high share of gross domestic product, while new energy, green transformation, and high-quality manufacturing, while growing rapidly, are a relatively small part of the economy, Xing Ziqiang told Yicai. The transition will be arduous and take two to three years, he noted.
With the central government increasing its leverage by issuing special treasury bonds to help ease the local government debt burden and the real estate sector, deflationary pressures should be partially offset, boding well for a higher inflation rate and better nominal GDP growth next year even though the recovery is expected to be limited and mild, Xing said.
Home sales will likely be near nine million this year, down 40 percent from peak and within Morgan Stanley’s long-term range of 8.5 million to nine million, while the number of projects starting this year more than halved from peak, indicating that the industry is close to the “equilibrium point” of this adjustment period, Xing said.
But that does not mean that the real estate market will stabilize in the short term, as buyer expectations have changed significantly, Xing said. Even if buying and lending curbs introduced during the market boom to prevent prices from spiralling out of control were lifted almost completely, confidence would remain weak, he said, adding that it will take time for buyers to return to the market with full confidence.
So the top priority for regulators is to introduce more policies to help stop the industry falling further, according to Xing. “We need to pay close attention to more upcoming supply-side supporting policies,” he pointed out.
For example, more effective policies to help private developers raise funds from bond issuance could help stem the contagion of credit risk in the real estate industry, or adequate financial support from the central government for projects that could improve public welfare such as affordable housing or home improvement projects for old and dilapidated residential areas. Such steps could help to stabilize the industry, Xing said.
The central government has set out a roadmap for resolving the local government debt problem, Xing noted. For provincial-level governments already near crisis, the central government has authorized them to issue refinancing bonds to replace maturing debt, thereby easing their immediate debt burden. In the medium to long term, the central government will help these provinces lower their debt burden by injecting fresh fiscal funding, which will be raised through new debt issuance by the central government itself.
For certain eastern coastal provinces with healthier finances, the local authorities will be responsible for cleaning up their own balance sheets, mainly using income from local state-owned enterprises to pay back the debts of their investment vehicles such as urban investment platforms, Xing said.
State-owned banks will also shoulder their share of the debt reduction process, Xing said. They could extend maturities or cut rates on urban investment vehicle debt, easing the pressure of their controllers, he said.
Editors: Tang Shihua, Futura Costaglione
Source: yicaiglobal.com
