Morgan Stanley's Xing Ziqiang: The real estate adjustment will come to an end in the next two years, the 3 trillion refinancing is just the beginning, needing 30-40 trillion

On July 3, Morgan Stanley's Chief Economist Xing Ziqiang made a forecast on the Chinese economy and conducted a detailed analysis of the real estate market at the 2024 Mid-term Investment Strategy Conference.

Xing Ziqiang, Executive Director and Chief Economist of Morgan Stanley, previously served as Executive Director of the Investment Management Department at Goldman Sachs (Asia) before joining Morgan Stanley. He also worked as the Head of China Macro Research at SAC Capital and as an economist at CICC.

Xing Ziqiang pointed out that the current Chinese economy is facing issues of weak domestic demand and consumption, and urgent policy adjustments are needed to strengthen social security, support consumption, and address concerns about employment and social security.

In dealing with internal and external challenges, it is necessary to draw on historical experience, especially the development path of the Japanese automotive industry, to enhance the international competitiveness of Chinese enterprises. The 517 New Policy introduced by the Chinese government marks the adjustment of the real estate market entering the second half, with expectations that this year and next year will be the end of the adjustment cycle, and the market will stabilize soon. The Investment Homework Representative has summarized some key points as follows:

1. Compared to economies that have experienced significant fluctuations in the real estate market such as Japan, the United States, and Spain, China has basically completed the adjustment of real estate quantity. Of course, there is still some room for price adjustments, but it is not far off.

2. The limited scale of the 300 billion (guaranteed housing) refinancing may require government quasi-fiscal funds of 3 to 4 trillion to return the current real estate inventory to normal levels.

3. I believe that after this round of downturn in the real estate market is digested, the situation will be better than Japan's 20 years of decline. China's period of severe low prices is gradually passing, and some industries with excess capacity are gradually resolving. Similarly, in the real estate sector, the market is not far from stabilizing. China's growth potential, especially the increasing efficiency of enterprises in the global industrial chain, still has considerable room for growth.

Below are the highlights shared by Xing Ziqiang, compiled by the Investment Homework Representative (WeChat ID: touzizuoyeben), for everyone to read:

Weak domestic consumption, policy space to be expected

This year, exports are relatively strong, and the manufacturing industry is relatively strong, but domestic demand and consumption remain weak, with no signs of improvement. This raises interesting questions about policy space in the future.

We know that there will be the Third Plenary Session in July, and there will be several Political Bureau meetings in the second half of the year. During this process, we believe that policies will further tilt towards ensuring people's livelihoods, supporting consumption, and addressing social security issues. Further dispelling the concerns of the general public about employment and social security.

Resolving trade frictions, China's auto industry can learn from Japan in the 1980s

In the past, Europe exported a lot to China, from luxury goods to some high-end cars. In recent years, with the rise of China's competitiveness, production capacity has also started to be exported, resulting in a change in the trade structure between China and Europe Even in the automotive field, the situation where the European Union enjoys a surplus is slowly changing, and China may surpass it, enjoying a surplus of cars to Europe, exporting more cars there than we import. Historically, the automotive industry has been a trade barrier and trade protection industry in major economies.

Starting from the 1970s and 1980s, Japan's automotive industry rose, but the US and Europe took some protectionist measures against Japanese cars. For example, since 1981, the Reagan administration in the US imposed tariffs on Japanese cars and restricted exports. How was this issue eventually resolved?

Undoubtedly, it was by having these car manufacturers establish factories globally, lay foundations locally, and solve local employment issues that made Japanese car companies grow into global brands.

Therefore, despite the US imposing tariffs on Japanese cars in the 1980s, the Japanese automotive industry still achieved remarkable success in the 1990s, becoming global champions.

I believe that the short-term setbacks encountered by China's automotive industry globally today are actually encouraging. Just like the Japanese automotive industry in the early 1980s, many excellent Chinese car companies will actively establish factories in Eastern Europe, Latin America, and the Middle East, build industrial chains, and eventually integrate into the global market, becoming global champion brands. This is also an experience in resolving trade frictions.

How to solve the problem of low prices and high leverage? Many positive factors are brewing

Regarding trade frictions, returning to the domestic consumption sector, in an event organized by Morgan Stanley Fund, we discussed China being in a relative negative feedback loop of low prices and high leverage. How to break this risk, restore moderate inflation, and bring the economy and corporate profits back to a reasonable level?

We proposed a five-step plan, such as reinflation, rebalancing, debt restructuring, reform, and rebuilding confidence.

A year has passed, how is the progress? There are joys and worries. From the recent policy progress we have reviewed, about 1/4 has been roughly completed, which means there are still many positive factors brewing, taking important initial steps in the right direction.

(Policies) need to make further efforts, especially in supporting people's consumption, addressing concerns, strengthening the social security system, and making it more practical in terms of medical insurance, pension insurance, affordable housing, and education.

Especially for new urban residents including migrant workers, new urban residents, and college graduates, strengthening security so that everyone is more willing to consume actively. There is still considerable room for improvement in this area.

We are looking forward to the upcoming Third Plenum and the Central Economic Work Conference at the end of the year to give the people a stronger sense of gain in this regard.

The next two years may be the end of this round of real estate adjustment cycle

In the short term, everyone is also concerned about whether the real estate market has bottomed out. The series of real estate policies introduced by the government on May 17th are worth noting. Some indicate that the stabilization of the real estate market and the clearance phase may enter the latter half. This year and next year may be the end of this round of real estate adjustment cycle.

Especially with this round of policies, not only in medium and large cities, in response to the new supply and demand situation in the real estate market, some restrictions on purchases and sales have been fully lifted, and some re-lending tools from the People's Bank of China have been introduced to address the issue of real estate inventory This not only helps to solve the market inventory, but also meets the reform of social security, so that everyone can have no worries and implement affordable housing.

If these policies gradually land, it marks the end of the real estate market adjustment that has lasted for three and a half years, and is expected to be close to the end of this year and next year.

In summary, this year's economy is relatively stable at the bottom, but very unbalanced, with crippled domestic demand and consumption. Whether it can turn around in the future depends on the need to increase policy intensity, especially the tilt of policies, resources, and fiscal efforts towards people's consumption, social security, and other areas.

Do you have confidence in the economic market in the medium to long term? Challenges and opportunities are huge

Looking at the medium to long term, do you have confidence in the Chinese economy and market? The challenges are great, but we also see very big opportunities.

Firstly, the period of the most severe low price cycle may have passed. For example, many industries have overcapacity issues, but both companies and decision-makers attach great importance to gradually helping to restore the balance between supply and demand.

We have reviewed the speed of capital expenditure of listed companies in China as a whole. Since the second half of last year, the speed of capital expenditure has slowed significantly. Many companies have spontaneously adjusted the supply side and reduced excess capacity. This is a good sign. After slowing down capital expenditure and investment expansion in 2015 and 2016, pricing power rebounded in 2017, with price indices such as PPI and CPI rising, and corporate profits improving. This is the initial scale of spontaneous adjustment on the supply side.

The government also noticed the overcapacity. At a symposium in Shandong, the top leadership issued warnings about excessive subsidies and overcapacity caused by local governments. Many ministries have successively introduced plans for capacity renewal and elimination in new energy industries, including lithium batteries, photovoltaics, etc.

If these plans come together, like the supply-side reforms in industries such as steel, cement, electrolytic aluminum, and coal from 2015 to 2017, it will significantly increase China's capacity utilization rate and alleviate overcapacity. The most severe period of the low price cycle is about to pass.

The 300 billion re-lending is just the beginning, we need 30-40 trillion

I just mentioned that the real estate sector is also approaching the end of the adjustment. What is the basis for this judgment?

Look at the similarity between China's real estate from construction volume to prices and the real estate cycles internationally. The fluctuations in global real estate follow a unified pattern. Before peaking in 2021, the sales and construction growth of China's real estate were very fast. After strict control measures were taken, the real estate market began to decline. Starting from 2021, the volume has basically adjusted.

Image Source: Morgan Stanley Xing Ziqiang live screenshot

Compared with economies that have experienced large fluctuations in real estate, such as Japan, the United States, Spain, etc., China's real estate volume adjustment is basically in place. Of course, there is still some room for price adjustment, but it is not far off. From the experience of other countries, the adjustment of China's real estate volume and prices is not far from the bottom. Whether the real estate policy changes can provide support and shorten the adjustment period is an important variable The recent introduction of the central bank's re-lending tool allows local governments to repurchase commercial housing inventory for the purpose of providing affordable housing, marking a shift in mindset. However, the question remains whether this can be effectively implemented.

We have summarized the progress of the People's Bank of China's re-lending tools over the past few years. Some tools, such as those used for upgrading manufacturing, are more easily utilized, with a typical utilization rate of 2/3 to 7 in the four quarters following their launch. However, tools like re-lending for rental housing have a utilization rate of less than 5% one year after their introduction. This indicates that there are still many pain points and obstacles to implementation.

It remains to be seen whether this time will be different. The recently launched 300 billion yuan (affordable housing) re-lending scale is not large. We estimate that in order to return the current real estate inventory to a normal level, government quasi-fiscal support of 30 to 40 trillion yuan may be needed. The 300 billion yuan is just the beginning, and we are observing its utilization progress.

China Will Not Experience a 20-Year Lost Decade Like Japan

As the current real estate cycle downturn approaches its end, the question arises: is there a long-term demand for real estate?

I tend to believe that China is in a better position than Japan and will not experience a 20-year period of deflation and stagnation like Japan did. The reason lies in the different stages of development between China and Japan. Our urbanization is still ongoing, with the urbanization rate much lower than Japan's peak in real estate in 1990.

When considering per capita housing area, excluding old rental housing and dilapidated housing before the housing reform in 2000, the per capita housing area of modern commercial housing in China is insufficient and smaller than that of Japan. All these factors indicate that there is still room for improvement in Chinese housing.

From the perspective of income and economic growth stages, our per capita GDP is only 17% of that of the United States, unlike Japan in 1990 when per capita GDP was higher than that of the United States. China is still in the catch-up stage, with the potential growth rate of income and GDP faster than that of Japan in the 1990s.

Taking these factors into consideration, I believe that after digesting the current downturn in the real estate sector, China will fare better than Japan did during its 20-year period of stagnation.

China's period of severe low prices is gradually passing, and some industries with excess capacity are gradually resolving. Similarly, in the real estate sector, the market is not far from stabilizing. China's growth potential, especially in enhancing efficiency for enterprises in the global industrial chain, still has considerable room for growth. China's competitive advantage has been evident in recent years.

We are exporting more and more new energy vehicles, new types of goods, and strategic emerging industries, with a more diverse range of export destinations. The proportion of our exports to regions relatively neutral or friendly to China geopolitically, such as developing countries, the Middle East, Latin America, and Southeast Asia, is increasing, leading to a more balanced distribution of export destinations. All these factors indicate that China continues to enhance its capabilities in the industrial chain, and the upgrading of manufacturing is not yet complete. Therefore, despite many challenges, there are also significant opportunities ahead.

In summary, the Chinese economy is stabilizing at a low level in the short term, but it remains unbalanced and requires policies to focus on supporting consumption, improving people's livelihoods, and strengthening social security. Looking at the medium to long term, after the real estate market digests its downturn, the stage of development with increased productivity is expected to be better than Japan in the 1990s, indicating significant long-term potential Source: Investment Homework Pro by author Wang Li

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