Jan 06, 2020 09:09 PM

Opinion: China’s Economy Is Entering a Temporary Recovery

November’s major economic and financial indicators were better than expected, implying that the rebounding official purchasing managers indexes (PMIs) were not an isolated phenomenon and that China’s economy is entering a temporary recovery. In my opinion, there are three factors that can drive the weak recovery forward.

First, the yuan depreciation seen in the past few months and a rebound in the world economy are likely to increase demand for Chinese exports. A remarkable feature of this round of yuan depreciation is that the yuan has not only depreciated against the U.S. dollar, but also against a basket of currencies including those of emerging Asian economies, which has a higher impact on exports than depreciation against the dollar alone. If we measure global monetary policy through the prism of changes in short-term interest rates, we can see that monetary policies around the world have been loosening for more than a year. The delayed spillover effect of monetary easing has shown up, leading to better-than-expected recovery of developed and emerging economies’ PMIs.

Second, China’s changing credit structure and earlier-than-scheduled sales of special-purpose bonds (SPBs) could accelerate infrastructure investment. In the past two years, the financial deleveraging campaign has led to a decline in nonstandard financing, which is a major source of funds for infrastructure investment. Judging from the tone of top policymakers at the meeting that set the 2020 agenda for the nation’s economy, they believe financial risks have been controlled, and their current attitude is to stabilize the leverage level rather than further deleverage, so nonstandard financing could hopefully see reasonable growth.

In 2020, three changes to SPB issuance by local governments deserve notice. First, the total amount of the bonds could continue to rise. The Ministry of Finance has issued an early allocation of 2020 SPBs totaling 1 trillion yuan ($143.5 billion), equivalent to 47% of the SPB quota for 2019. Investors expect the 2020 quota could surpass 3 trillion yuan. Second, a higher share of SPB proceeds could go to fund infrastructure investment. The central government has ordered that SPBs not go to land reserves or shantytown renovation. Third, top authorities have relaxed the minimum capital ratio requirement for some infrastructure projects.

Finally, property sales remain resilient and there is room for developers to lower home prices to boost sales. In the first 11 months of 2019, total residential floor space sold increased 1.6% year-on-year, indicating that demand has not flagged.

In the long run, although the population is aging and its growth is slowing, the process of urbanization is not over yet. As the urban population aged 35 to 49 will increase gradually over the next decade and that aged 25 to 34 will begin to decline, the biggest change in the real estate market will be a decline in first-time homebuyers while demand for second homes will grow. However, the public’s purchasing power cannot support even higher home prices. So, if developers want to maintain sales at the levels seen in previous years, they have to refrain from raising home prices or even lower them. For example, the sales rise seen in the third quarter in 2019 was, to a large extent, a result of developers cutting prices. By analyzing sales data for the third quarter of 2019 released by listed property developers, we can see that there was a significant negative correlation between growth in sales volume and prices.

While mainstream investors continue to crow that China’s economic growth will continue slowing in the short term, and will recover in the second half of 2020, I believe growth could probably rebound in the first half of 2020, before being weaker in the second half, which means the recovery will be temporary. One reason is that the high growth in property investment in the past two years is not sustainable. The number of new projects has grown at a slower clip and is likely to fall in the second quarter of this year, which could drag on economic growth in the second half.

Xu Xiaoqing is director of macro strategy at Zhejiang-based investment company DH Fund Management Co. Ltd.

This article has been edited for length and clarity.

Translated by Guo Yingzhe (

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