One of China’ s leading investment banks says that both domestic and overseas financial institutions are excessively pessimistic in their assessment of the country’s economic growth prospects, pointing to high levels of government savings as well as underestimates of potential housing demand.
A public WeChat post made by China International Capital Corporation entitled “Why pessimistic forecasts for China are repeatedly wrong?” (中国的悲观预测一错再错?) points out that negative predictions for Chinese economic performance have all proved erroneous in the recent past.
“At the start of 2016 the market was generally concerned that China would rapidly see a credit crisis, and that there would be a major devaluation of the renminbi and a marked slide in economic growth.
“These forecasts with excessively pessimistic: in the fourth quarter of 2016 China’s actual GDP growth was 6.8%, slightly higher than the preceding quarter, and the first rebound since the end of 2014.
“Despite this being the case, at the end of last year the market still forecast that real GDP growth would slow to under 6.5%, and that the RMB exchange rate would fall to over 7 against the dollar. Yet the actual data again indicated that these forecasts were excessively pessimistic.”
In stark contrast to its industry peers, CICC says it maintains firmly optimistic predictions of China’s near-term economic growth.
“We forecast that next year China’s economic growth could again be slightly higher than the preceding year.
“In addition we forecast that China’s nominal GDP growth will be greater than 10% over the next two years…China’s nominal income growth will return to over 10%, and have a profound impact on enterprise profit growth, changes in bank asset quality, as well as investor asset allocation decisions.”
While both domestic and overseas observers have expressed increasing concern about China’s leverage levels, with some analysts estimating that the debt-GDP ratio is already over 350%, according to CICC this problem is overstated due to the huge savings rates and cash holdings of the government.
CICC points out that primary reason for China’s high leverage levels are in fact these excessively high saving levels within the public sector, as well as the “severely lagging” development of financial markets.
“The excessively rapid rise in the savings rates of the public sector are an important reason for the worsening of China’s leverage ratios.
“In addition to the household sector, China’s broad government sector (including various government institutions and public institutions, but not including state-owned enterprises) also possess huge bank deposits, comprising as much as in excess of 30% of GDP.
“Although growth in the deposits of government institutions has already fallen significantly from over 20% two years ago, as of the end of September these deposits are still greater than 32.2% of GDP.
“These deposits exceeds all of the ostensible debt of government, and in the past several years have continued to remain higher than nominal GDP growth.
“At the same time, the cash in hand of the corporate sector can cover around 40% of enterprise debt, and over 60% of these cash deposits are held by SOE’s.”
“The challenge brought by an excessive surplus of savings is higher opportunity costs for long-term growth, but this does not at all mean that there will be a credit crisis or liquidity risk in the short and medium term.”
CICC points out that the core problem for the central government’s deleveraging campaign lies in those reform measures whose goal is the reduce China’s low-efficiency savings rate, as well as improve public finance administration.
In CICC opinion these reforms won’t have the effect of weakening economic growth, but will on the contrary “reduce and invigorate large volumes of idle funds and capital, and be of benefit to driving economic growth and raising efficiency.”
“Over the past two years the Chinese government has implemented a series of efforts to invigorate the stock of funds, including improvements to the drafting and implementation of budgets, reduction of taxes and fees, and allowing the savings gathered by government insurance and housing funds to be invested in capital markets, as well as increasing transfer payments without raising the fiscal deficit.”
CICC also points out that the high level of government’s saving deposits means that the Chinese economy still bears marked opportunity costs for low-efficiency savings, it also “provides potential solution for ‘painless’ deleveraging.”
With respect to China’s real estate market, CICC also believes that forecasts by the market are excessively pessimistic.
CICC notes that reasons commonly cited by analysts for a pessimistic take on the property market and its impact on the broader economy include: 1) supply on China’s residential housing market exceeding demand, which will lead to a major adjustment in home construction investment; 2) a passing of the peak in residential housing demand due to China’s easing rate of urbanisation and ageing of the demographic structure, and 3) real estate investment comprising a high percentage of total investment, and a large-scale decline in real estate investment weighing on total investment and GDP growth, leading to a rise in non-performing loans and deflation.
According to CICC these concerns over look a number of other factors which will serve to avert a real estate crash and associated economic impacts.
“We believe that the main issue for China’s real estate dilemma is supply not matching demand, yet a well-designed public housing policy can effectively support ongoing growth in internal demand, as well as expedite a balancing in equitable wealth allocation, restriction an excessively rapid rise in home prices as well as maintain balanced government budgets.”
CICC claims that China’s actual urbanisation rate remains low at around only 40%, and only increasing at a pace of one percentage point each year.
In spite of the renown of its giant megalopolises such as Beijing, Chongqing and Shanghai, with populations in excess of 20 million people, China still suffers from a scarcity of big cities, with only 23% of the population living in urban centres with populations of more than 1 million.
In sharp contrast, 45% of US citizens and 65% of Japanese live in cities with populations greater than 1 million, leading CICC to include that there will be huge influx of Chinese into large-scale cities with populations of at least 10 million.
In addition to this the home-ownership rates of Chinese households remain amongst the world’s lowest, with the owner-occupancy ratio of urban residents falling from 72% in 2000 to 70% in 2010, despite the large volume of new homes built in the intervening decade-long period.
The quality of homes remains low, with data cited by CICC indicating that 24% of urban homes lack their own kitchen or toilet.
CICC sees low home-ownership rates, the need of improved housing and low urbanisation driving demand above market forecasts.
CICC further points out that household leverage remains extremely low with respect to he real-estate market, with mortgage loans at under 10% of total real estate value in China, as compared to 45% in the US.
