“House Destocking”: China Politburo Hints New PLan To Fix BIggest Drag On The Economy

China’s Politburo meeting on economic policy took place today, and as SocGen’s Wei Yao reports, the most important takeaway from the meeting is that policymakers are shifting their attention to housing destocking, as they pledged to ‘study measures’.

As usual about 3 years behind the curve, Beijing policymakers – who burst China’s housing bubble sparking unprecedented wealth destruction across the country once the world’s largest asset class (as the chart from Goldman shows)…

… went into freefall 3 years ago, have been alarmed by the drop in housing sales and home prices in recent months, and finally sense the urgency to provide more measures to avoid a sustained downturn, which can be harmful for household wealth and confidence, not to mention can lead to sporadic revolutions which overthrow the ruling “communist” kleptocracy made up of billionaire oligarchs.

According to the SocGen strategist, “this change of attitude is important and with sufficient measures could help put a floor on housing. This may be THE catalyst to extend the recovery in confidence and equity markets, at least cyclically.“

Below we excerpt several more key points from the SocGen report:

Growth has improved but it’s not the time to reduce support. Policymakers acknowledged that the economy has improved, but demand remains insufficient and external uncertainty has risen notably. That is probably related to recent complaints from various countries on China’s overcapacities and the upcoming US election. Hence, economic policies need to avoid tightening too quickly. So we shouldn’t be concerned that policies will be less accommodative even with the improvement in 1Q GDP.

The focus is on faster implementation of announced policies. Policymakers pledge to frontload and effectively implement macro policies that have been announced. That is in line with our expectations that no fresh stimulus will be added. These involve speeding up the utilisation of special CGBs and special LGBs, flexibly using interest rates and RRR cuts to lower financing costs, as well implementing the replacement of consumer goods and equipment. Therefore, we should see a continued recovery in infrastructure investments, while the strength of replacement policies is more uncertain as it depends on local policies. We also expect the PBoC to cut the the RRR and the 5y LPR further.

Government to help on housing destocking? Beside countercyclical policies, the most important change is on the property sector. Policymakers pledge to study policies to support housing destocking, with no details announced. This is mentioned by policymakers for the first time, and follows more easing measures at a local level recently (e.g. relaxing purchase restrictions in Chengdu and promoting new home sales by tasking local SOEs to purchase existing homes from potential buyers). While it remains to be seen how the policies will be funded with local governments under fiscal pressure, this change of attitude is important, and can help reduce the chance of a sustained decline in house prices.

The statement also mentioned other key policy goals, such as resolving local government debt risks (good luck). The government is focusing on reducing debt in high risk provinces, but it also stresses on growth stability, which means it will not push too hard since all growth in China is debt-funded.

It is also interesting to note that the tasks to support low-income groups and to build a social safety net are mentioned, but without concrete details. Other tasks include promoting new productivity, resolving smaller banks’ risks, promoting capital market development and implementing measures to reach peak carbon.

Separately, it was also announced that the Third Plenum, which had been delayed, will take place in July and will discuss reform directions to promote “modernization of the economy.” The confirmation of the date in itself is likely to be viewed as a positive sign, even though we do not have high expectations from the plenum yet.