2014-09-30

Chief Economist at Haitong Sees Real Estate Cycle Low in 2017

Echoing what Michaal Pettis has said about Chinese growth rates, Li Xunlei says that slower growth rates are good for China. If GDP growth stays high, a financial crisis will be closer and closer.
Lee Xunlei: Chinese economy is basically in a downstream process, and is far from the bottom. In terms of overall growth expected this year, about 7.3 percent, next year will be lower. There are three factors that may cause the Chinese economy to continue to slow down: The first is the aging of the population, and the second is the debt ratio of the whole society is relatively heavy, need leverage, it is impossible to have good growth in investment. The third is the Chinese technological progress is slowing.

But I do not feel pessimistic, but think this is a good thing. Future economic anchor China's GDP growth should be around 6%. This is a very good sign. In the course of the economic downturn, to be able to adjust the structure, squeezing out some of the foam. Despite the economic slowdown, but the people's income and consumption growth will exceed the GDP growth rate.

On real estate:
Lee Xunlei: Real estate is probably the biggest factor for a financial crisis triggered in China, if there is no effective way to reduce the debt ratio, the point is likely to occur around 2017, the logic behind this is that China's construction period (also known as the Kuznets cycle) as early as 2010 had a downward inflection point, continues to be downward, maybe it can extended to 2017,2018 or even 2020, with regards to real estate, autos these two used to stimulate growth in the past 10 years, the negative impact is huge.


李迅雷:中国房地产危机或在2017年 难避免

Recent sustained "cool" macro data, so that the market generally downward pressure on the Chinese economy highlights expressed concern. As research in the field of domestic securities veteran, vice president of Haitong Securities chief economist Lee Thunder interpretation of the current situation is not pessimistic.

"Only the GDP down, the Chinese economy have hope." In the "First Financial Daily" interview, Lee Thunder said that if the Chinese economy continues to remain high, it will be away from the financial crisis is getting closer. In the course of the economic downturn, the structure can be adjusted along with the bubble can burst, a good thing.

"Daily": Macroeconomic data in August does not seem satisfactory, many people expressed concern. Talk about your views on the current macroeconomic situation and forecasts for the future.

Lee Thunder: Chinese economy is basically in a downstream process, and is far from clear. In terms of overall growth is expected this year, about 7.3 percent, next year will be lower. There are three factors that may cause the Chinese economy to continue to go down: The first is the aging of the population, and the second is the debt ratio of the whole society is relatively heavy, need to leverage the investment it is impossible to have good growth. The third is the Chinese technological progress is slowing.

But I do not feel pessimistic, but think this is a good thing. Future economic anchor China's GDP growth should be around 6%. This is a very good sign. In the course of the economic downturn, to be able to adjust the structure, squeezing out some of the foam. Despite the economic slowdown, but the people's income and consumption growth will exceed the GDP growth rate.

"Daily": You CPI for the next two years and the employment situation is how to judge?

Lee Thunder: CPI year on year growth should still remain low, expected next year, probably around 2%. Employment pressure will increase, economic growth will definitely affect it down, but not too serious, Chinese total workforce reduction will reduce the pressure on the new employment in the tertiary industry rose light capital, making The same capital investment can be solved more people's jobs, it will ease the pressure on employment.

"Daily": From the first half of this year, the Chinese real estate market began to cool down significantly, new home sales and inventory increments are substantially reduced. This round is expected to be more violent than the outside whether the recession will continue, whether China's real estate market is collapsing? Whether the government's hand can change this trend?

Lee Thunder: Real estate is probably the biggest financial crisis triggered China factors appear round, if there is no effective way to reduce the debt ratio, the point is likely to occur around 2017, the logic behind this is that China's construction period ( also known as the Kuznets cycle) as early as 2010 had been a downward inflection point, there continue to be downward, or place has been extended to 2017,2018 or even 2020, which for real estate, cars these two in the past 10 years the negative impact of stimulating economic growth in the dominant industry is huge.

Government will certainly take loose monetary policy, which is the case with the United States more like the original. United States in 2000, there have been downward inflection construction cycle, the result of government has also taken the extremely loose monetary policy, but in the end because there is no effective deleveraging, or led to the subprime crisis occurred. For China's real estate bubble, the Government will take some action, such as the first step is phasing out the purchase, the second step is to reduce lending rates, the third step is to reduce the ratio of the first suite of mortgage down payment, and the fourth is no room to provide preferential loans. After these actions are to be done, prices will continue to fall. This requires further reduce interest rates, otherwise, it may appear on the 1990 Japan occurred in the real estate bubble burst, then, the residents of mortgage loans from the current highest quality assets into the most dangerous assets. Therefore, the future of China's economy can avoid financial crisis, the key depends on Chinese enterprises in the process of deleveraging, businesses can effectively decrease the cost of financing. Leverage can not go, then trigger the crisis, such as 2008's America; crisis can not drop interest rates, the occurrence of such 1990s Japan.

Each round will have a long period of economic crisis such a process occurs, there is an effective way to avoid difficult. Historical experience shows that when the most difficult to control fluctuations in asset prices, like stock prices, there is no way to save the government, the stock market rose, the government has no way to stop it. Over the past 13 years, Chinese prices have been rising, the government has taken many measures are ineffective. Similarly, when prices fell, the government is equally difficult to stop. However, in the enterprise to leverage the same time, the government added leverage should be possible to move, combined with state-owned enterprise reform, equity transfer, etc. to jointly promote, after all, China is a Western and Japanese government resources are unmatched. Of course, the government must increase leverage to enhance transparency, otherwise the efficiency will be greatly reduced.

"Daily": how to evaluate the effect of the central bank introduced this year to implement directional loose monetary policy?

Lee Thunder: directional loose, which is quite upset, partial substitute for fiscal policy. Because monetary policy is usually the total amount of the policy, structural policy is usually caused by fiscal policy to do. Monetary policy is now directed to do structural policies, in part to replace fiscal policy, in the long term is not sustainable. But the central bank to do nothing wrong, is completely correct, but monetary policy in the course of the economic downturn, and its role than fiscal policy. After all, the market is from the "invisible hand" to regulate, the Chinese economy after 30 years of rapid upward, should now be to the downside when the policy can only be a smooth downward curve, does not change the downward momentum.

"Daily": What is your assessment of the progress of financial reform for this year, in your opinion, in the interest rate market, exchange market, the deposit insurance system, liberalized capital controls and other aspects have not made some substantial breakthroughs??

Lee Thunder: financial reform has been pushing the government, but must be followed by administrative reform, tax reform, the state-owned enterprise reform, social reform match, in order to succeed. Third Plenary Session should be made to fully and deepen reform, financial reform is certainly a single to fail.

Overall, the highlight of this year's financial reform much. Like some people are more concerned about financial reform, such as the interest rate market, the exchange rate market is certainly not finish in the short term, the deposit insurance system, said a long time, but until now it has not been pushed. Shanghai Free Trade Zone inside deregulation, it is not equal to the opening of the capital account, the experimental progress in the interest rate market free trade in the region has been slow. On the other hand, the negative list of relevant progress with financial restructuring is not large.

I think it should be like Keqiang Prime Minister said, reducing approval, advocating the negative list of administrative reform is imperative, if not reduce staff, these people are sitting on the approval of the hole, the implementation of the negative list would be very difficult.

"Daily": I noticed that you recently talked about the current trend of the A-share market, the proposed "structural bull market early," the judge, specifically how to understand?

Lee Thunder: The interest rate on the securities market impact is very large. China's long term interest rates are down the line, on the stock market constitutes a positive, but at the same Chinese company's overall earnings growth will also decline. It would appear that earnings growth banking, real estate, cars and steel, nonferrous metals, petroleum, petrochemical, coal, cement and other traditional cyclical industries will be down, thereby offsetting the decline in interest rates enhance the role of valuation levels. Therefore, in the high-growth sector investment should be chosen. The structural bull market with the ongoing structural transformation of the Chinese economy related. We are optimistic that the new + transition of the industry, entrepreneurship, small plates bull market has gone two years, reflecting China's economic transformation. While traditional industry valuations cheaper, but if not transformation, future earnings growth is still not much space. But the Shanghai Composite Index is cyclical heavy power lines accounted index and does not reflect China's economic transformation, its weight is mainly in the banking, real estate and other traditional industries, traditional industry reforms that do not advance, the index is difficult to have a good performance .

"Daily": Hong Kong and Shanghai brought through the inflow of foreign capital will soon floodgates for banks and other blue chips have relatively large boost?

Lee Thunder: no. Now the so-called blue-chip, blue chip of the future is not. For example, the price of bank shares are cheap, if it is blue-chip, why no one sought it. Even if there is no use of foreign optimistic, because it can not change the overall investment philosophy Chinese investors. For valuation spreads both large-cap stocks will be reduced, but still always there. Mainly because of the cost of capital for foreign investors to get low, the dividend yield is very sensitive to. The high capital cost of domestic investors on the dividend yield is not sensitive. Secondly, mainly to see investment prospects. Now the profitability of banks in the whole Chinese economy accounted for already too high and certainly will decline in the future, earnings accounted for emerging industries to upgrade. It would appear that the bank is part of the risk of a growing industry. Third, the Chinese stock market is still an emerging market, speculation is strong, and this feature, there is no further development of 20-30 years can not be reversed.

"Daily": From the perspective of the financial side, the Hong Kong and Shanghai A shares through will not constitute a positive overall trend?

Lee Thunder: I think it is limited. Because the entire Chinese economy from past investment-led transformation to a consumer-driven economic growth in the downstream, high-yield investment era has passed through Hong Kong and Shanghai can not change foreign investors interested in China fundamentally.

If the A shares of rational foreign institutional investors have a very big attraction, then, why China's pension does not come in, and why insurance companies have not significantly increase the proportion of equity investments, the ratio now stands to reason that the insurance holding up 30%, only 10% or so now. Why is far larger market expansion for investors constitute bad? Since everyone believes foreign investment will pass through Hong Kong and Shanghai inroads into why what with respect to the H-share discount of large cap stocks always rise up, and the size of the investor does not take the opportunity to hunters do? So, these are implicit logic through Hong Kong and Shanghai A shares will not have a greater boost.

"Daily": For October upcoming Fourth Plenary Session of eighteen, you have any expectations?

Lee Thunder: I personally most concerned about is strengthening the legal system, which is to improve China's national governance reform, to the community and create a better legal environment is very favorable. I also found that we did this government for the socio-economic problems seen very thorough, and learning ability is very strong, realistic understanding of the problem as time goes on more and more awake, so I was coming to China Comparison of confidence.

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