Construction site of an Evergrande housing complex in Beijing on Sept. 13, 2021.
Greg Baker/AFP via Getty ImagesThe news out of China isn’t doing much to lift the dour sentiment on Chinese stocks, with the latest spate of data showing an economy in the midst of a slowdown and fallout from property developer China Evergrande Group ‘s debt travails continuing. But there could be a silver lining in the bad economic news: Possible stimulus as policy makers try to manage the economic slowdown.
The latest data suggest the Chinese consumer isn’t doing that great. August retail sales grew 2.5% from the prior year, slower-than-expected and a 12-month low as Beijing grapples with new Covid-19 outbreaks ahead of two key holiday periods for consumer spending. The only bright spots that registered gains from the prior month were sports and recreational items and cosmetics but past beneficiaries from when people were stuck at home, like furniture, didn’t see a pickup, suggesting they may have already upgraded their homes.
Pantheon Macro economist Freya Beamish writes in a note on Wednesday that she remains worried: “There should be a rebound in September but a speedy pickup in consumption would mean households dip into the savings they have built up during the pandemic, though that seems unlikely in the current backdrop of uncertainty.
Beyond the fresh Covid infections, there is also the uncertainty created by the government’s recent crackdown in an array of sectors, from after-school tutoring and the big internet companies to casinos—all of which could keep consumers wary of spending as they see benefits like wage gains.
The view from the property market, a major source of economic growth, has been gloomy as well, with home sales by value falling 19.7, the biggest decline since the throes of the pandemic.
Still unknown is the political and economic fallout from Evergrande’s troubles, with protests from frustrated investors and those who pre-bought apartments. In a note to clients, Capital Economics Chief Asia Economist Mark Williams says the root of the trouble for indebted property developers like Evergrande (ticker: 3333: Hong Kong) stems from residential property demand shifting into a period of sustained decline—and that means construction could slow substantially over the next year and developer defaults could ripple through the corporate sector by tightening credit conditions and slowing their ability to invest.China has been targeting the leverage held by property developers and trying to bring down housing costs as authorities tackle growing inequality. But the pressures on the property developers brings challenges to the economy, especially as construction is a key source of growth and commodity demand, Williams writes.
The potential for widespread pain though could be what helps avert it. With so many people having bought new properties before they are completed, authorities have an incentive to keep projects going though Williams says authorities would likely prioritize home buyers over creditors. “The central concerns of property policy now appear to be the level of housing costs and developer leverage,” writes Williams, adding that a slowdown is unlikely to push policy makers to relax limits on developer borrowing.
The prospects of an economic slowdown could prompt policy makers to cut interest rates, according to a note on Wednesday from Société Générale ‘s Kit Juckes.
While Beijing is unlikely to shift its policy stance aggressively and pump out waves of stimulus like much of the developed world, most strategists and money managers expect it to try to smooth out the slowdown—especially as Chinese leader Xi Jinping makes a bid for an unprecedented third term next year.
That could provide a floor for Chinese stocks though it’s possible declines continue in the near-term. The iShares MSCI China ETF (MCHI) is down 2% at $68.72 on Wednesday.
Write to Reshma Kapadia at reshma.kapadia@barrons.com
Looking for Silver Linings Amid China's Bleak Economic Outlook - Barron's
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