In recent days, China has proposed relaxing some of its strict zero-Covid policies and property market restrictions. These measures will help ease the two biggest drags on the country’s economic growth and asset markets.
The negative forces
For some time now, we have argued that the zero-Covid policy (ZCP) and property market woes were holding back the country’s growth and financial markets. The uncertainty they have created has hit public confidence and restrained consumption and investment, as well as disrupting production, local and global supply chains, and mobility.
Under such circumstances, we believe monetary easing has become as ineffective as pushing on a string. In our view, China needs to restore public and corporate confidence and embark on strong fiscal expansion to revive growth. The latest policy announcements appear to indicate a shift in that direction.
The policy pivot
Refining the ZCP:
On 11 November, Beijing announced 20 measures to fine-tune its stringent Covid controls, among them:
- Shortening the quarantine period and lifting the quarantine requirement for indirect close contacts
- Cancelling the ‘circuit breaker’ scheme for inbound flights
- Limiting the use of polymerase chain reaction (PCR) disease diagnosis tests
- Narrowing the coverage of risk areas
- Reducing local additional restrictions
- Accelerating the booster vaccination programme
- Improving the healthcare system
- Stockpiling anti-Covid drugs.
While it is uncertain how and when these changes will be put in place, the shift signals a significant move away from focusing on eliminating the virus. The emphasis in official communications is now more on the need to increase vaccination among older people (especially those aged 80 or older), as well as improving healthcare and hospital facilities and stockpiling anti-Covid medications.
China has re-calibrated its Covid controls. We have long argued such steps would bolster both the public’s and the authorities’ confidence in tackling the epidemic. The increase in vaccination rates and expansion in Covid-specific medical capacities can be seen as signposts confirming an eventual exit from the ZCP.
Property market policy:
On 13 November, the People’s Bank of China (PBoC) and the China Banking & Insurance Regulatory Commission (CBIRC) jointly issued a package of 16 measures to support the property market.
These included aid for delivering building projects and stabilising property transactions by enhancing financial assistance for developers – including privately owned ones – and protecting homebuyers’ legal rights. It is the first time since the Evergrande problems emerged in mid-2021 that a written regulation has been issued to ease the sector’s financial problems.
The move may mark a turning point, not least as Beijing now appears keener to strengthen its support for the sector compared to its previous somewhat informal and piecemeal ‘guidance’.
In conjunction with the easing measures already in place, these more comprehensive measures, if implemented properly, should go a long way to reducing the number of developer defaults (and thus credit risk in the system), diffusing the contagion risk stemming from the mortgage boycott, and improving public confidence. These new property sector measures suggest the worst is over; a market recovery could well follow, if only slowly.
A turn for the better
If the policy changes are implemented well, 2023 GDP growth could surpass the prevailing market consensus prediction of less than 4.0%. Easing Covid restrictions should boost consumption and augment the growth momentum from increased production and investment. A more stable property market could also help improve consumption and investment.
Externally, if the US Federal Reserve slows its policy tightening as the market expects, global risk appetite should improve. This would in turn help boost sentiment towards Chinese assets.
Most investors are tactically underweighting China. Portfolio flows could return to China in 2023, boosting the yuan/US dollar (CNY-USD) exchange rate, as sentiment shifts away from the current extreme pessimism.
The stars may well be aligning for China’s recovery.
 See “Chi Time: China’s Growth Crosscurrents – What’s New?” 20 July 2022. (here)
 See “Chi Flash: Saving China’s Economic Growth”, 25 April 2022. (here)
 See reference in footnote 1, and “Chi on China: An Assessment on China’s Property Market Risks”, 29 September 2022. (here)
 See “Chi Flash: China’s Mortgage Boycott”, 22 July 2022. (here)