China outlook dims further on fresh COVID-19 surge, real estate slump

Nurluqman Suratman

16-Nov-2022

SINGAPORE (ICIS)–China’s economic outlook just turned dimmer amid downbeat October data, with surging domestic COVID-19 infections and slumping real estate market threatening to aggravate weak petrochemical demand.

New-home prices in China’s 70 cities in October fell by 0.37% month on month, marking a 14th straight decline and the worse decline in seven years, National Bureau of Statistics (NBS) data showed on Wednesday.

On a year-on-year basis, new home prices for the month fell for the sixth straight month, declining by a steeper 1.6% compared with a 1.5% drop in September.

“China’s 16-point plan [unveiled 11 November] to boost the real estate market is yet the clearest indication that the government is ending its clampdown on the real estate market as it eased the cap on lenders’ exposure to the property sector,” said Ho Woei Chen, economist at Singapore-based UOB Global Economics & Markets Research.

China has also eased quarantine and flight bans, marking a more targeted approach to its zero-COVID policy and further relaxation of its curbs despite a spike in new cases in multiple major cities.

Domestic prices of polyethylene (PE) and polypropylene (PP) rose following the introduction of the measures on 11 November.

On a CFR (cost and freight) China basis, linear-low density PE (LLDPE) prices have risen by $20-40/tonne since the announcement, while PP prices increased by $30/tonne, according to ICIS senior Asia consultant John Richardson.

China, however, has yet to provide a clear timeline for an actual re-opening, while the rest of the world have mostly adopted a living-with-COVID approach.

“While the measures indicate the government is giving more attention to economic growth, any near-term lift to China’s recovery will still be limited due to current record surge in COVID infections in cities such as Guangzhou, Zhengzhou and Beijing as well as its adherence to a zero-COVID policy and remaining stringent COVID measures,” UOB’s Ho said.

Expectations of improved demand following recent measures continued to buoy up sentiment in China’s domestic petrochemical futures markets on Wednesday morning, with methanol futures rising by 1.1%.

Petrochemical Futures Price in CNY/tonne
(As of 03:30 GMT)
% change from previous day
Styrene monomer (SM)              8,193 -0.4
Monoethylene glycol (MEG)              3,991 0.1
Linear low density polyethylene (LLDPE)              7,913 0.3
Polypropylene (PP)              7,771 0
Polyvinyl chloride (PVC)              5,908 0.2
Methanol              2,605 1.1
Purified terephthalic acid (PTA)              5,384 0.6

Sources: Dalian Commodity Exchange, Zhengzhou Commodity Exchange

“We will see lots of rebounds in markets that won’t last, such as this week’s recovery in Chinese equities and polyolefins pricing on the real-estate rescue package and the tinkering with the zero-COVID rules,” ICIS’ Richardson said.

“Reasons for further short-lived rebounds might include more economic stimulus by Beijing,” he noted.

“But major resets in economic policies are unlikely because of the firm commitment to “Common Prosperity”,” Richardson said, referring to the concept introduced by Chinese President Xi Jinping in 2021 aimed at redistributing more of China’s wealth to the poor via government policies.

“And until China can revaccinate enough people with messenger ribonucleic acid (mRNA) vaccines, the zero-COVID policies may have to remain in place,” Richardson added.

For the real estate market, earlier measures were introduced to boost funding for the sector, with yuan (CNY) 400bn ($56.5bn) from second-tier banks and CNY600bn from China’s six largest lenders by the end of this year.

“It could take a few more months for the property sector to recover due to the pandemic and Beijing’s reluctance to deregulate the sector and stimulate home demand in large cities,” Japan’s Nomura Global Markets Research said in a note.

“Even after a recovery, new home sales could settle on a level significantly lower than prior to the pandemic,” it said.

In January-October 2022, investment on property development fell by 8.8% year on year while October industrial output growth decelerated to 5% from 6.3% in September.

CHINA COVID-19 CASES RISING
As of 14 November, local new infections stood at 17,772 new local COVID-19 infections, up from 16,072 a day earlier and the most since April.

All of China’s 28 provinces and four municipalities – Beijing, Chongqing, Shanghai and Tianjin – were actively recording locally transmitted cases.

In Beijing, local caseloads have surged rapidly over the past week, with daily case numbers on 14 November reaching 462 – the highest level since the pandemic began in early 2020.

“There is a high risk that fine-tuning efforts will be offset by local officials implementing further tightening measures, as local officials still believe their performance is determined by avoiding massive infection numbers,” Nomura said.

“After March 2023, a reopening is more likely, but progress may be slow, painful and bumpy, and the release of pent-up demand may be moderate and settle at below pre-COVID levels,” it said.

Wakening external demand also continued to take a toll on China’s economy, with October exports falling for the first time in more than two years, while imports shrinking due to new COVID-19 curbs.

October exports shrank 0.3% year on year, a sharp reversal of the 5.7 % growth in September, marking the worst performance since May 2020.

Imports also fell by 0.7% – the weakest outcome since August 2020 and a reversal of the 0.3% increase in September.

The world’s second-biggest economy is slowing down, with GDP growth projected to decelerate around 3.0%, representing a sharp slowdown from the 8.1% pace set in 2021, based on projections from multilateral institutions.

The downward pressure on China’s economic growth could strengthen over the next few months as COVID-19 cases could surge further in response to colder weather and the fine-tuning measures, which may elicit worse lockdowns, Nomura said.

“Easing measures on [China’s] zero-COVID strategy (ZCS) could be largely offset by local officials’ escalation of ZCS, as stamping out coronavirus is still perceived to be the most important performance measure for local officials,” it said.

Export growth may also drop further on weaker global demand and Beijing has yet to find a reliable solution to reboot housing demand as the ZCS continues to weigh on new home sales, Nomura added.

China posted an annualised GDP growth of 3.9% in the third quarter, up from 0.4% in the previous quarter.

Focus article by Nurluqman Suratman

Additional reporting by Fanny Zhang

($1 = CNY7.08)

Thumbnail image: Shanghai skyline, China – 31 July 2019 (Source: Shutterstock)

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