Positive signs from China’s first quarter data

2020 has been a historic year so far. Unprecedented global lockdowns in response to the COVID-19 have resulted in economic fallout and stock market turbulence around the world. In China, the economy contracted in the first quarter. The encouraging news is that most economic activities have resumed in early March, with the property sector holding up surprisingly well.

Stifled by the coronavirus outbreak, the Chinese economy shrank at the start of 2020 for the first time in more than 40 years, ending an era of uninterrupted growth dating back to the 1970s. In the first quarter, the country’s gross domestic product (GDP) fell 6.8% year-on-year (y-o-y) – falling short of market expectations of -5.0%1.

Despite the somewhat disappointing GDP figures, China’s A-market was surprisingly resilient on the day of data release (17 April 2020), with the CSI 300 index rising approximately 1%. Upon closer inspection, the resilient performance was largely helped by the improving trend, as evidenced by the March data, including better than expected property activities.

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Growth in property investment

Unsurprisingly, first quarter economic data showed weakness across the board, due to the pandemic causing an economic shutdown and delaying resumption of work. However, the March data points to a sequential improvement throughout the first two months of the year, suggesting that economic activity is on track to return to normal. As shown in Fig.1, China’s fixed-asset investment (FAI) in March fell 9.5% year-on-year (y-o-y) – significantly less than the 24.5% y-o-y contraction in January and February. Specifically, on a y-o-y basis:

  • Manufacturing remained muted, with March yet again recording a double-digit decline of 20.6%
  • Infrastructure investment managed to narrow its contraction to 8%
  • Property investment bucked the negative trend to grow by 1.2%

Fig. 1: Growth in fixed asset investment


Further property statistics also demonstrate the sector’s resilience. For example, y-o-y declines in new starts and property sales narrowed to 10% and 14% respectively in March – far less than the 45% and 40% declines reported in January and February (see Fig. 2). On an even more positive note, the floor space completion in March was just 0.9% lower than last year – a sign of recovery in property activities.

Fig. 2: Growth in property new starts and sales


It will not be surprising to see a further recovery in investment activities in April, underpinned by work resumption and a stronger push for local government special bonds. This could partly explain why the central government has remained prudent and refrained from rolling out aggressive policies in recent months.

Policy outlook: Will property control measures be relaxed?

Simply put, yes. However, it will likely be targeted fine-tuning on a city-by-city basis, instead of a blanket relaxation for the entire country.

Although some local governments have introduced a number of property purchase relaxation policies, many of them were quickly recalled. This illustrates that the long-term policy tone of ‘houses are for living, not speculation’ remains in place. The recent asymmetric cuts in China’s loan prime rates (LPR) – 20 basis points (from 4.05% to 3.85%) in the 1-year rate, versus 10 basis points (from 4.75% to 4.65%) in the longer term 5-year rate that impacts mortgages2, suggests that a nation-wide relaxation of property purchase policies is unlikely.

This does not mean property policies will be as tight as last year. The simple fact is, China’s economy faces increasing downward pressure, and local governments will be incentivised to test the bottom line of the central government’s housing measures. At the same time, increased monetary easing, easier credit lines and lower interest rates will jointly have a positive impact on property activities.

Can China’s economic recovery continue?

The potential drag from exports has yet to be felt. Because most other countries only began lockdowns in March, the first quarter export data does not provide a full picture of the impact of the global economic fallout. Since mid-March, anecdotal evidence shows a rising number of cancelled overseas orders, implying that external shocks to exports will likely become more material in the coming months.

With the central government placing ‘employment’ on top of both its ‘six stability’ and ‘six security’ missions, it seems that ‘employment’ will very likely replace ‘GDP growth’ as this year’s top economic focus. Even though the urban unemployment rate trended lower in March than in February, the labour-intensive export segments are still under pressure. A potentially higher unemployment rate may weigh on household income as well as corporate investment. As such, the future export and labour market data will help to gauge the pace of China’s economic recovery.

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