Lending Association

China’s stock market in crisis amidst property slump and IMF’s housing alert

A week before the start of China’s Lunar New Year break on February 10, the country’s stock market has experienced its worst performance in five years. Despite government support discussions for the market, property companies’ concerns overshadowed the market due to the Hong Kong court’s decision to order the liquidation of China Evergrande, the country’s second-largest developer with $US328 billion in debt.

Investors seemingly ignored Monday’s reduction in bank reserve ratios, which was said to release $US141 billion to banks for lending. Cynical analysts believe that this funding has already been allocated to property companies and other sectors.

Chinese shares hit new five-year lows on Friday, marking their worst weekly drop in five years. However, strong earnings reports from Amazon and Meta helped bolster global stocks, ahead of the key U.S. jobs data later in the day.

Contrasting, weak results from midweek activity surveys for the economy further dampened sentiment. The Shanghai Composite closed 1.5% lower on Friday, partly impacted by a massive 41% decrease in New Energy vehicle sales in January compared to December, particularly by BYD, the largest car maker.

For the week, the Shanghai index plummeted by 6.2%, marking its most substantial loss since October 2018. The blue-chip CSI300 also hit a five-year low, dropping 4.67%. Year-to-date, the CSI has fallen more than 6%, while the Shanghai market has lost 7.8%.

Investors are growing impatient with the lack of significant stimulus to boost demand and confidence. While much was promised last month, the government remained silent last week.

Some analysts suggest that the strong results from U.S. tech giants this week highlight how far China has fallen behind the U.S. in this vital sector.

The U.S. Federal Reserve’s decision to maintain interest rates had no impact on Chinese markets as it aimed to quell market optimism about a March rate cut.

In the upcoming week, China will release consumer and producer price data, with a minor improvement expected in deflation levels for both measures. Additionally, China will consolidate January and February data on trade (imports and exports), investment, production, unemployment, and retail sales.

However, the International Monetary Fund’s annual report on China’s economy, released late December, may further challenge confidence in China and its troubled property sector. The staff report predicts a 50% drop in housing demand over the next decade, citing a decline in new urban households and a surplus of unfinished or vacant properties.

This slowing demand for new housing could prolong the adjustment into the medium term and weigh on growth, according to the IMF. The Fund anticipates China’s economic growth to slow to 4.6% this year, down from 5.2% in 2023, and further decline in the medium term with projected growth of about 3.5% in 2028.

The IMF attributes China’s economic challenges to weakness in its property sector and subdued external demand. China’s real estate sector and related industries have accounted for about a quarter of the country’s GDP, with the recent property market slump following Beijing’s crackdown in 2020 on developers’ high reliance on debt for growth.

The Chinese government disputes the IMF’s predictions, with Zhengxin Zhang, China’s representative to the IMF, arguing that the Fund’s prediction of a 50% drop in new housing demand “overestimates the possible market downturn.” Zhang believes that housing demand will remain substantial, and policy support will gradually come into play.

The IMF report compared housing demand and new starts from the 2012 to 2021 period with estimates for 2024 to 2033, highlighting the need for continued correction in the property market following government efforts to contain leverage in 2020-21.

The IMF predicts that China will break free of consumer price deflation, possibly aided by an expected rebound in pork prices, with inflation expected to rise to 1.3% this year. Unlike in other countries where housing has boosted inflation, in China, the real estate slump has pushed price levels lower.