In this episode, Thomas Gatley discusses his report on reshaping corporate China. They analyze winners and losers during the profit shock, the challenges faced by private and state-owned enterprises in the real estate sector, and the regulatory tightening that hinders investors from investing in new Chinese stocks. They also explore the changes in China's industrial policy since 2020.
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Quick takeaways
The decline in the real estate sector poses a challenge for sustaining high rates of infrastructure investment and generating sufficient aggregate demand.
Chinese firms, especially in the private sector, face challenges in raising capital both onshore and offshore, affecting growth prospects and investor confidence.
China's industrial policy has driven a shift towards capital goods and tech hardware industries, potentially creating an imbalance between supply and demand in the economy.
Deep dives
Real Estate Sector Decline and Its Impact on Capital Allocation
The real estate sector in China is experiencing a significant decline, with property sales and starts dropping to less than half of 2019 levels. This decline has major implications for capital allocation as real estate investment has been a dominant force in the Chinese economy. While the government has been pushing for investment in capital goods and tech hardware industries, the scale of the decline in real estate investment is so significant that it cannot be easily replaced by investment in other sectors. This creates a challenge for sustaining high rates of infrastructure investment and generating sufficient aggregate demand.
Challenges in Corporate Capital Raising
Chinese firms, particularly in the private sector, are facing challenges in raising capital both onshore and offshore. Regulatory tightening, especially in the US, and geopolitical tensions have led to a decline in funds raised through IPOs and limited foreign investment in Chinese firms. This decline in capital raising affects the growth prospects of these firms and creates a sense of uncertainty and lack of confidence among investors. State-owned enterprises, on the other hand, have better access to financing and have not been as heavily impacted by these challenges.
Industrial Policy and Shift in Capital Allocation
China's industrial policy has been driving a shift in capital allocation towards capital goods and tech hardware industries. The government's preference for these sectors is evident in subsidies and tax savings offered to firms operating in these industries. While this approach has been successful to some extent, it has also created a potential imbalance between supply and demand. The decline in the real estate sector, which has been a major source of demand, poses a challenge as other industries may not be able to fill the gap effectively. This imbalance could impact the overall stability and sustainability of the Chinese economy.
Uncertainty and Scenarios for the Future
The future of the Chinese economy remains uncertain, with multiple scenarios possible. If the government recognizes the challenges in the real estate sector and takes appropriate measures, such as providing guarantees to developers and implementing fiscal stimulus, there is a possibility of stabilizing the situation and sustaining growth. However, failure to address these challenges may lead to a significant decline in growth and a potential crisis. The decline in real estate investment could also impact external demand, especially amid deteriorating relationships with major trading partners. The magnitude of these challenges requires urgent and effective central government response to avoid further destabilization.
Conclusion
The decline in the real estate sector and the shift in capital allocation towards capital goods and tech hardware industries are key trends shaping the Chinese economy. The challenges in raising capital, the need to maintain a balance between supply and demand, and the uncertainty surrounding the future present significant considerations for policymakers. Timely and strategic actions are crucial to ensure economic stability and sustainable growth in the face of these challenges.
In this episode of Pekingology, Freeman Chair in China Studies Jude Blanchette is joined by Thomas Gatley, China Strategist at Gavekal Dragonomics, to discuss his recent report “Reshaping Corporate China.”
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