Economic fallout from continuing Covid lockdowns in Shanghai and elsewhere in China is hard to predict. Overall declines in China share prices this year, especially in Hong Kong, contributed to a drop in the number of mainland billionaires on the new 2022 Forbes Billionaires List unveiled today. (See related post here.)
Ultimately, however, the current Covid-related disruptions are likely to be followed by monetary, fiscal and regulatory policy easing in the second half of the year, Matthews Asia Investment Strategist Andy Rothman said in a telephone interview from San Francisco today.
“My assumption is that over the next few months, they will get this under control so that lockdowns will be lifted,” the long-time China watcher said. “And then we’ll see Chinese officials go back to the (policy) playbook that they started announcing in December and then put more details on earlier this year, which amounts to a significant easing of monetary, fiscal and regulatory policy at the same time that the U.S. is going to be tightening.”
“My expectation is that if Covid and the associated lockdowns do material damage to the economy over the next few months, then in the second half of the year, this monetary, physical and regulatory easing will be enhanced and be doubled down by the government,” he said.
Prior to joining Matthews Asia in 2014, Rothman spent 14 years as CLSA’s China macroeconomic strategist; earlier, he worked for 17 years in the U.S. Foreign Service, with a focused on China, including as head of the macroeconomics and domestic policy office of the U.S. Embassy in Beijing. Interview excerpts follow.
Flannery: How do you size up the impact of lockdowns on China’s economic outlook this year?
Rothman: It’s a hard question to answer because it’s really hard to forecast what the public health impact of Covid will be in the coming months in China. But I think it’s helpful to look back a little bit when we think about this.
We have seen in other places in China, there have been quite severe lockdowns, but they haven’t lasted for very long — in places like Shenzhen, which is very important economically, and Xi’an, which is important in the tech space. The lockdowns didn’t last long enough to result in any material damage to the consumer sector, tech space, or China’s contributions to the global supply chain. The lockdown in Shanghai has been going on for a much longer period of time, and it’s unclear how long it will go on. Obviously, the longer people can’t go out, open their shops, consume and do everything normal, the bigger the impact will be.
But I think there are still too many unknowns in trying to forecast what the impact for the full year will be. One of the good things is that the majority of the cases are asymptomatic. As far as I understand, there are not a lot of hospitalizations and just a handful of deaths. In fact, the number of cases is really trivial compared to what we’re seeing in many other countries.
My assumption is that over the next few months, they will get this under control so that lockdowns will be lifted. And then we’ll see Chinese officials go back to the (policy) playbook that they started announcing in December and then put more details on earlier this year, which amounts to a significant easing of monetary, fiscal and regulatory policy at the same time that the U.S. is going to be tightening.
And my expectation is that if Covid and the associated lockdowns do material damage to the economy over the next few months, then in the second half of the year, this monetary, physical and regulatory easing will be enhanced and be doubled down by the government. And this is a government that knows how to do stimulus. We’ve seen it before. They have the political will. They have the financial resources and know how to do this.
If we assume that and the lockdowns come under control within the next couple of months or so, then we should see a strong recovery in the second half of the year because of that fiscal, monetary and regulatory policies.
Flannery: How about the property market outlook?
Rothman: For me, the property market comes under the heading of regulatory easing. I think a couple of things are important to know when talking about the residential property market in China. First, to me, talk of a bubble is misguided. Bubbles are all about leverage. That’s why I tell people that if you want to understand why the U.S. had a
housing crisis about a decade ago, you only need to really look at one statistic, which was that in 2006, the median cash down payment was two percent of the purchase price.
In China, by regulation, the minimum cash down payment for a new home that’s going to be your primary residence is 20%. I have yet to speak to a bank that will accept less than 25% cash down. Also, the overwhelming majority of people who are buying new homes in China are buying them to live in. I don’t see it as speculative.
And then there are some other interesting points. In the U.S., one of the problems (ahead of the 2008 financial crisis) was that most mortgages were not being held to maturity by the issuing bank. They were being sold off. The banks had little incentive to do due diligence. It’s the opposite in China.
It’s (also) important to look back to last year and see that the property market was actually quite healthy in the first half of the year, but then the government was worried about risks among a small number of developers. The government basically used its policy tools to shut down the property market the second half of the year. They basically told banks to stop issuing mortgages. That pushed about 20 or so developers to default on some of their obligations, and government is hoping that it’s going to result in consolidation in what’s a very fragmented industry.
Now the government clearly overdid this and went too far. They have acknowledged this, course corrected and are encouraging banks to issue mortgages again. And the (central) government has also made clear that local governments can do this on an ad hoc basis — take their own policy steps to try and restart the market.
And we’re seeing that across the country. My assumption is that during the second half of this year, people who wanted to buy a house because they made more money, got married or had a kid, or want to get a first home or upgrade to a nicer place (will be) finding that mortgage availability is going back to normal.
Flannery: How should investors should stock investors be viewing all this?
Rothman: I focus on the macro and the policy issues. In general, my main point is: China drives global economic growth. It is, on every year, on average, responsible for about 1/3 of global economic growth. That’s a larger share of global growth on average, over the last decade than from the U.S., Europe and Japan combined. So the first take away from me from that is it’s really important for every investor to understand what’s happening in China. Because even if you don’t invest directly in Chinese equities or bonds, what happens in China has a big impact on everything else.
For example, GM every year sells more cars in China than it goes in the U.S.; tech companies like Intel, Qualcomm and Nvidia get a very large share of their global revenue from China. Understanding that is really important, even if you don’t invest there. But for an investor that’s looking for a market that where the economy drives global growth and a market that is typically uncorrelated to the U.S. market, especially when the U.S. is going into tightening, it’s worth taking a look.
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