WWRR Vol.2.015

Sep-09
Sep-10
Sep-11
Sep-12
Sep-13
Sep-14
Sep-15
Sep-16
Sep-17
Sep-18
2019 Global Economic and Market Outlook
Larry Hu, PhD
+852 3922 3778
larry.hu@macquarie.com
Irene Wu
+852 3922 3796
irene.wu@macquarie.com
China: All eyes on property again
In a nutshell, the economic cycle in China is the property cycle. As such, while the key words for
2018 have been “Deleveraging” and “Trade war”, for 2019 it could once again be “Property”, just
as seen in 2012 and 2015.
Over the past two years, thanks to the shanty town renovation program, the property sector
surprised to the upside, especially on the investment side. While sales growth (in floor space)
slowed to 2% yoy in Jan-Oct 2018 from 8% in 2017, investment and new starts were up 10% and
16% yoy during this period, compared with 7% growth for both in 2017. Looking ahead into 2019,
given the cut on the shanty town renovation program, as well as the frontloading of housing
purchases amid the latest housing up-cycle, the year of 2019 could see housing data softening
across the board. Specifically, we expect sales and new starts to drop around 5% next year, while
investment growth could slow to around 3%.
Less and less helicopter money
The shanty town renovation program has played a pivotal role in driving the current housing upcycle
since 2015, especially in lower-tier cities (other than the 27 tier-1/2 cities). The program
boosted sales, lowered inventory and thereby led to higher prices, which in turn strengthened
expectations of more price increases and thereby led to even more sales. This positive feedback
loop is the key behind the housing boom over the past years.
Shanty town renovation is funded by the helicopter money printed by the PBoC called Pledge
Supplementary Lending (PSL). As property inventory has been almost cut in half compared with
the peak three years ago, the voices have become louder and louder in and out of the government
to call for tapering the program. In July-Oct 2018, PSL only rose by RMB126bn, the lowest in the
past three years.
The reduced intensity of the shanty town renovation program is reversing the positive feedback
loop aforementioned. Softening sales have led to higher inventory, resulting in developers cutting
prices, causing buyers to wait longer and thereby weaker sales.
Financial conditions to ease ahead, but no big stimulus before next summer
The good news is that financial conditions, as measured by the average of mortgage rates and the
10-year treasury yield, could ease next year as policy has moved into an easing cycle again. So far
in 2018, policy makers conducted three targeted RRR cuts (in April, June, and Oct) and used MLF
lending to support credit growth. As such, 10-year treasury yield dropped to 3.4% in November
2018 from 3.9% at the end of 2017. We expect it to drop more in 2019.
Moreover, from 1Q19 the government could start cutting the benchmark rate, which is linked to the
mortgage rate. That said, according to the historical experience, while the financial conditions
started easing from 4Q11 and 4Q14, this didn’t prevent 2012 and 2015 from becoming big property
down-cycles.
Fig 26 PSL to fall further in 2H19
Fig 27 Financial conditions to ease next year
RMB bn
180
New PSL
2016 2017 2018
% yoy
70
Property sales
Average of mortage and 10y treasury yield(RHS)
%
6.0
160
60
140
50
5.5
120
100
40
30
5.0
80
60
20
10
4.5
40
0
4.0
20
-10
0
-20
3.5
-20
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Source: Wind, Macquarie Macro Strategy
Source: Wind, Macquarie Macro Strategy
4 December 2018 20