Wang Tao: China’s Market Share Gains Are Unlikely to Be Sustained After Covid-19
Wang Tao is the head of Asia economics and chief China economist at UBS Investment Bank. The article is the second part of the “Understanding China” 2021 series.
Can China sustain its exports amid supply chain restructuring?
China’s dependence on exports is declining and its rise in global market share in 2020 may not last. After expanding rapidly for over two decades, China’s market share of global exports has stagnated in recent years, partly due to trade friction with the U.S. Also, its dependence on exports has declined since 2008, with both exports and the current account surplus dropping to 17% and 1% of GDP in 2019, respectively.
In 2020, however, China’s exports have been stronger than expected, thanks to increased demand for Covid-19 related protective gear and stay-at-home products. This was the case even in the U.S. market where Chinese products faced higher tariffs.
China’s “first in, first out” pandemic path and supply chain resilience has helped it gain global market share since the second quarter. As the pandemic becomes more controlled, production elsewhere ramps up, and consumers switch to more services, we think China will face more competition, and its market share gains are unlikely to last. Nevertheless, a strong global recovery should help support China’s export growth to reach 10% in dollar terms in 2021.
Phase one trade deal to stay but more stable China-U.S. relations ahead.
Higher U.S. tariffs contributed to a 13% decline in Chinese exports to the U.S. in 2019 before the Phase One trade deal in January 2020 helped to stabilize trade relations. Although the pandemic makes it difficult for China to purchase as much from the U.S. as agreed ($321 billion worth of goods in 2020-21), we expect the Phase One deal will last for now, as China has stuck by and large with other parts of it and significantly increased imports from the U.S. in recent months. It would take time to negotiate any new deal, so the current tariffs and tech restrictions are expected to continue in 2021.
Apart from trade, China-U.S. relations deteriorated in 2020 as the U.S. administration expanded its “entity list,” restricted investment in some Chinese companies, imposed sanctions related to Hong Kong, raised concerns on Taiwan and imposed visa restrictions.
While we expect the Biden administration to stay tough on China and not reverse these measures soon, we expect the new U.S. government to adopt a more rules-based approach, be more open to communications, and be more predictable. As a result, we see reduced uncertainty and risk in U.S.-China relations ahead.
Supply chain restructuring over the longer term.
Exporters started to shift the supply chain out of China in light of rising land and labor cost after the global financial crisis and before the trade war.
UBS’s CFO surveys showed that intentions to move some production out of China were increased by trade war risks and the pandemic-revealed vulnerability of global supply chains. While supply chain moves may have been delayed or slowed due to pandemic disruptions, we think the elevated concerns on tech restrictions and political risks will likely continue to drive diversification away from China.
On the other hand, similar concerns may lead some Chinese producers to move back to China. And, the country’s large and expanding domestic market (it accounted for 11% of global imports in 2019 and domestic consumption is expected to rise to $17 trillion in 2030) will influence some supply chains to move closer to the country, especially with the government’s push to further open the market.
How will the property market perform?
The property sector is very important to China’s economy and a source of macro risk. China has witnessed a long-lasting property boom since the late 1990s, with housing prices rising multiple times and property construction a key engine of growth. Property market correction often occurs when sector policies are tightened, though the 2014-15 downturn was also a result of excess build-up and high inventories.
In recent years, following the property de-stocking policy support in 2016-17 (including shanty-town subsidies), the authorities have adopted more differentiated policies towards the sector, delaying property tax and hoping for sustained long-term development.
In 2019, we estimate that real estate investment accounted for about 20% of total fixed asset investment, and property could drive over 25% of China’s GDP growth.
Local land sales revenue was 7.1 trillion yuan ($1.1 trillion) in 2019, contributing 25% of total local government budget revenue. Property related loans totaled 48.8 trillion yuan in the third quarter of 2020, accounting for 29% of total loans outstanding (vs 20%/22% in 2010/15). The overall exposure is much bigger if considering property-related corporate bonds, shadow credit and other credit with property/land as collaterals.
How to understand the property bubble debate?
Firstly, fundamental and upgrading demand from rapid urbanization and income growth have been key drivers for the property boom, while investment demand also has played an increasing role.
However, the aging demographics with declining population of main homebuyers (25-44 age group) since 2015 is challenging in the long-term. Secondly, though the property price/income ratio is significantly high in large cities and rental yields are low, the national average affordability has been improving over time with average price/income ratio staying low in 2019. Thirdly, property-related leverage has increased sharply, especially after 2015, with mortgage/GDP ratio recently reaching 37% compared to 21% in 2015. The loan-to-value ratio remains low thanks to China’s elevated down-payment requirements and could help Chinese households afford more downward adjustment of housing prices.
Strong property rebound post-Covid-19.
In 2020, after a sharp drop in the first quarter due to Covid-19, property activities have rebounded strongly since April (property sales +8% year-on-year and investment +10% from April to November), thanks to release of pent-up demand, monetary and credit policy easing and land and hukou reforms.
In addition, China more than doubled old-town renovation to cover 7.26 million households in January-November 2020. We estimate that old town renovation investment could exceed 700 billion yuan in 2020 (5% of total real estate investment), which is much smaller than that of shanty town renovation but should have modestly helped support property investment.
The government has reiterated "no speculation" in the property market, while mainly focusing on rental market development to solve property issues in large cities. We expect property policies to be more hawkish in light of a strong growth rebound and more focus on risk control, with tougher rules persisting on developers’ financing and related credit, and some over-heating cities tightening home purchase rules.
The latest UBS China housing survey in the third quarter of 2020 showed that homebuyers’ purchase intentions and confidence improved from the Covid-19 shock but still remained weaker than a year ago. Overall, we expect property sales to decline by 1% to 3%, new starts to fall by 3% to 5%, and property investment growth to slow to 1% to 3% in 2021.
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