Restructuring policy speeds up recovery of Chinese economy

Editor's note: Wang Jianhui is the general manager of the research & development department at Capital Securities. The article reflects the author's opinions and not necessarily the views of CGTN. 

Looking at the recently released quarterly economic data, we may have good reasons for both optimistic projections and serious concerns. The economy, on the bright side, has been on track for recovery after the disruptive COVID-19 pandemic, whose after-effects are still to be felt. 

The widely-feared deflation did not become reality although the threat has not disappeared. However, we could not help wondering whether we should have seen better performance given the unprecedented accommodative policies, especially the monetary ones. After all, similar powerful measures did work much more quickly and effectively during the 2008-2009 global financial crisis.

It is rather surprising that fixed investments have not fully responded to the easy monetary environment as expected. In the first three quarters, accumulated fixed investments increased by 3.4 percent, a little higher than the 3.1 percent during the same period of last year. Such a score seems lukewarm given the seven times of lowering the reserve requirement ratio (RRR) and the six cuts of the medium-term lending facility (MLF), one of the leading interest rates, to two percent since July 2021. 

In contrast, the government only needed three cuts of the RRR and the leading rate (one-year savings rate) at the end of 2008 and the beginning of 2009 to boost investment growth by 5.5 percentage points within 6 months. Due to the slow improvement in investment, new jobs could hardly be created in time, while urban unemployment rate started to edge up during the past year from 5 percent to 5.1 percent. As a result, the monthly growth of urban retail sales slumped from 6.7 percent to 3.2 percent.

One of the major issues could be the policies regarding the real estate industry, which has been a key area subject to policy adjustments during the boom-bust cycles in China. It is indispensable because it contributes on average 7.38 percent of the accumulated growth of gross domestic products (GDP) each year (median calculated based on the data from 2014 to August 2024), not to mention its close relationship with households of the nation. It draws attention in both high and low circumstances due to its sensitive correlation with the banking system, since its loans account for 21.2 percent of total bank loans even after dropping by 7.8 percentage points from the peak level in 2019.

To contain the price surge, avoid asset bubbles that may potentially threaten safety of the banking system, and prevent excessive funds from flowing into the speculative market instead of real economic areas, the government has carried out a series of harsh restrictions, especially tight controls on bank loans and other financial tools such as equity and debt financings for the real estate companies. These measures, which are contrary in direction to those dealing with the 2008-2009 crisis, have worked well initially. The price indices for new and existing homes have declined from 104.3 and 103.5 in June 2021 to the current 93.91 and 90.98, respectively, for three consecutive years. Total funds collected by the industry for property project development drastically slumped from 17.9 trillion yuan in 2019 to 7.0 trillion yuan in August this year, and bank loans for the same purpose were down from 2.52 trillion yuan to 1.02 trillion yuan.

The negative side effects, however, have also kicked in with increasingly strong effects. The extended down trending property prices have made home buyers more cautious rather than jumping into the market. The accumulated sales by floor area of commercial housing have decreased by 18.50 percent, while the inventory has grown by 15.2 percent on average (both medians calculated with monthly data from February 2022 to August 2024). Consequently, monthly fixed investment of the industry has been declining by 7.3 percent on average since April 2022, dragging down the country's total fixed investment by 1.52 percentage points in the third quarter based on its share of 20.76 percent. In other words, the most recent growth rate of fixed investments would have been at least 4.9 percent without the negative contribution from the property industry.

Obviously, the government has realized that the previous measures – of being tough on the real estate industry but lenient on others – need to be "restructured," if not thoroughly overhauled. A market-oriented and well-functioning real estate industry is needed to ensure healthy development of the overall economy. 

A series of official announcements have been made, including lifting restrictions such as purchase quotas, sales restrictions, and price caps, reducing interest rates for housing provident fund loans and lowering the down payment ratio for housing loans, promoting the de-stocking of existing commercial housing through monetary compensation, and most importantly, allowing banks to provide loans as soon as possible to all real estate companies. 

The new measures, if promptly carried out without any reservations, will take the industry out of its misery and release its positive potential to help boost the overall economy within the next several quarters.