Figure 1: COVID Cases in China
Announcements from the China authorities over the past few days has caused a wave of optimism that the worst could be seen on the property crisis and the zero COVID policy. The package of moves for the property sector are important. Firstly, they show that the authorities now want to more proactive in supporting the property sector and avoiding a hard landing and the moves came sooner than we expected – we had been waiting for measures in December or March. An RRR cut or LPR cuts could be seen in November to support the package. Secondly, they are aimed at helping property developer’s liquidity problems, with key measures to allow extended time for repayments alongside the mid-week addition of extra liquidity. However, this does not address solvency issues of weak property developers, where liquidity alone will not be enough. Risks remain of defaults on offshore bonds, while a rescue solution is needed for onshore bonds and loans. Meanwhile, though the package includes some relaxation for mortgage borrowers with unfinished properties, sentiment in the residential property sector remains poor and we feel that further house price declines will likely be seen in 2023 ( here). Overall, the property move is not a game changer in itself.
Meanwhile, China authorities also announced some changes to the dynamic zero COVID policy. Domestically the most important measures are that contacts of contacts no longer need to quarantine and contacts of infected people quarantine is reduced to five days in a quarantine facility then three days at home (subject to negative tests). A key additional measure is a vaccination drive for elderly people. International arrivals quarantine are also being reduced. This is all helpful, but needs to be viewed as fine tuning rather than the start of a shift to an endemic policy. Firstly, a large portion of the elderly remain unvaccinated or under vaccinated and really require an mRNA vaccine. China is developing mRNA vaccines, but has yet to authorise and has shown no signs of being willing to rollout foreign vaccines domestically as it would hurt politically. Secondly, Omicron spreads rapidly and is still circulating significantly around the world. The 2020/21 experience around the world shows that full exit without large scale vaccinations can fail, with repeated restrictions or lockdowns being imposed. The Shanghai lockdown earlier this year also shows that China may start with lighter measures, but if COVID control is not achieved then the authorities resort to serious lockdown measures. It is likely that COVID cases will pick up in China during the winter and this is likely to lead to renewed city lockdowns. The key game changer on COVID remains China authorising an mRNA vaccine and a mass vaccination program. We await concrete news on these. We do assume that this will happen over the next 6-12 months and that is why we are looking for an economic recovery to 5% growth, but not beyond due to remaining residential property weakness.