Recent developments highlight that prioritising short-term growth is no longer a priority of China, as per a report by analyst Christopher Wood of Jefferies.
Writing for “Greed and Fear”, Wood said that rather the priority is pursuing long-term stable growth, which means managing ongoing concerns about excess leverage, as well as upgrading the quality of growth.
With GDP per capita currently at $10,500, it would suggest annualised growth of at least 4.7 per cent to put China on a par with countries like Greece and Portugal at their 2019 levels. This assumes China’s GDP per capita will double in US dollar terms to $21,000 by 2035, a goal unveiled by Xi last November.
Wood said that a reminder of the conservatism of current Chinese policy at the macro level came on Friday when Premier Li Keqiang set a target for 2021 real GDP growth of only above 6 per cent.
Similarly,China also published its latest five-year plan on Friday for the period 2021-2025. For the first time ever, in terms of the 14 five-year plans announced by the PRC, the latest plan contains no average growth target, Wood said.
The tightening bias is also reflected in a continuing squeeze of the residential property sector. Premier Li re-committed to keeping property prices stable in his speech on Friday.
The first rule, introduced last August, forces 12 major leveraged developers to conform to specific financial ratios. This includes a 70 per cent ceiling on debt to assets, a 100 per cent cap on net debt to equity and a cash to short-term liabilities ratio of at least one.
These are significant and worth detailing here again given the importance of the residential property sector in China, not least in terms of the amount of credit the sector has traditionally absorbed. The China Banking and Insurance Regulatory Commission (CBIRC) and the PBOC jointly published a new regulation on December 31, based on a five-tiered system, effective January 1.
Limits were put on both total property lending and also mortgage lending based on bank size. For the large state-owned banks, the ratio of outstanding property loans to total loans is capped at 40 per cent while the ratio of outstanding mortgages to total loans is capped at 32.5 per cent.