Growth Dragons Weekly: China Third Plenum Transitions Away from Real Estate-Driven Economic Growth
What happened in China this week:
China Third Plenum: Transitioning Away from Real Estate-Driven Economic Growth
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Midea’s Hong Kong IPO Approved
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#1 China Third Plenum: Transitioning Away from Real Estate-Driven Economic Growth
China's 3rd Plenum meeting has released comprehensive details targeting various corners of the economy. The aim is to clean up laws and policies thoroughly, optimizing options for local governments and businesses to grow and prosper. Here, we summarize the overall direction the Chinese government plans to take to tackle the difficult macroeconomic conditions and how these measures complement each other in building a holistic economy.
Build a resilient supply chain. As a manufacturing economy, China seeks to improve its industrial supply chain, engage in foreign trade and investment, and reform its deep-rooted state-owned sectors. The government aims to expand domestic industries to engage in “exploration, production, supply, storage, and sale of strategic mineral resources.” This approach allows domestic businesses to be less affected by international protectionism measures.
Encourage entrepreneurship. To build a formidable supply chain, a strong pool of private businesses is fundamental. China aims to encourage entrepreneurship by formulating a private economy promotion law (民营经济促进法), breaking down barriers to market access, refining financing support policies, and ensuring private companies can participate in major national projects. Previously, the private sector in China faced unequal treatment, such as high interest rates and extra charges. This policy seeks to retain high net worth individuals and businesses.
Develop new productive forces. China has specific industries in focus, dubbed “the new productive forces,” including new energy, artificial intelligence, and biomedicine. These industries are gaining increasing attention and investment.
Attract foreign investments. Foreign businesses are encouraged to invest and trade in China as the government seeks to expand its “high-level opening” through improved customs clearance, taxation, and foreign exchange policies. China will also shorten the negative list for foreign investment and remove all market access restrictions in the manufacturing sector. Upgrading pilot free trade zones and accelerating the development of the Hainan Free Trade Port are specific examples of this strategy.
Develop financial markets. China aims to pride itself on high-quality businesses and a robust financial market. The country will enhance the ease of equity investment and venture capital operations by foreign investors and support eligible foreign institutions in participating in financial business pilot projects. Policymakers also vowed to reduce barriers to foreign investment, including shortening the negative list. The recent banning of short-selling and controls over IPOs are seen as tentative measures to cool down the market and will be replaced as the market matures.
Recovering real estate industry and deleveraging local governments. China continues to support its real estate industry by reforming how real estate projects are financed and improving the pre-sale system for housing. Additionally, China seeks to rebalance the fiscal relationship between local and central governments to avoid large accumulations of hidden debt. This includes reforming local government financing vehicles, as many local governments are heavily indebted from the property crisis.
Building consumption confidence. China's strategy to stimulate demand focuses on property markets and reforming societal norms. Measures include gradually increasing the retirement age, improving the social security system to enhance equality among rural and urban households, and supporting employment and higher education. Understanding that China has an aging population, these reforms aim to increase productivity and enable young adults to start new families, ultimately strengthening spending power.
Our views: China has taken the bitter pill of bringing down its real estate industry, causing significant pain and a loss of confidence among foreign investors. While it was a huge price to pay, it was necessary. The impact would not have been so substantial if the property bubble have been addressed earlier. The bubble led local governments to accumulate excessive debt, and now, China’s new policy in this Third Plenum aims to deleverage local governments and reduce reliance on real estate for growth. Though it is a long road ahead, this approach will foster more robust economic growth driven by diverse activities rather than being dominated by real estate. No great economy should be built on real estate speculation. The Third Plenum sets the stage for recovery and making things right. We believe that Chinese leaders understand the problems well and that the policies are relevant in addressing them. The property issue and the initial clamping down on tech in China have caused financial markets to tumble, foreign investment outflows, and reduced wealth effects and consumption. We can see China has policies tackling each of these issues.
China’s central bank has also supported demand stimulation by cutting the 7-day reverse repurchase rate by 10 basis points. Following the rate cut, a central bank-backed body announced that the national one-year and five-year-plus loan prime rates (LPRs) have been lowered by 10 basis points. Many banks, like ICBC and ABC, have responded by cutting rates on deposits of 2 years or more by 20 basis points. Although the rate cut came as a surprise, it should help the property market and consumption in the short term. Long-term solutions will come from the execution of China’s Third Plenum policies.
#2 Tong Ren Tang IPOs Its Hospital and Pharmacy Arm
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