Roger Hirst [00:00:07] Welcome to The Corona Correction Series in association with Refinitiv. I'm your host, Roger Hirst. China has been trying to reinvent its economy for the past few years and intends to use the upheaval from the Corona crisis as yet another catalyst for change. Joanna Davies, Senior Economist of Fathom Consulting, however, remains skeptical that China has been able to initiate real change, rather than simply extending the credit-fueled expansion of the last decade. I asked her about the spare capacity in the property market and the outlook for employment. 

Joanna Davies [00:00:36] Struggling to find alternative sources of sustainable growth, china's policymakers have long encouraged the investment boom that we've seen in China, and I think really their response to Covid 19 is no different, and the rhetoric might be about them pushing into 5G and high tech investments, but actually that's nothing new. We've seen this all before. It's very reminiscent of Xi's 'Made in China 2025' plan, which was all about pushing China into these high tech fields, climbing by a chain, and actually China's had very little progress on that front. And it's also gone quite quiet on that front. Since it's become sort of the crosshairs of the tensions between the US, and China. So while others seem to be of the opinion that this test, that Covids brought China and arguably the biggest test on record for the Chinese economy, provides an opportunity for China to reorientate its economy and move away from these old levers of growth, such as home investment and more into the conceiver and the high tech. We're actually far more skeptical on that front. I think part of the reason for our skepticism is that rebalancing is really difficult to do. So we've looked at how other emerging markets have attempted rebalancing. And on average, growth kind of is static in the immediate aftermath of those efforts. But even after that immediate impact, growth is still considerably weaker, about two percentage points on average. So we're talking sort of three, four years after that initial and difficult period of trying to reorientate the economy growth is still weaker. And recognizing that, we've had this very half-hearted approach from China. We've referred to that in our research as China's "hokie cokie" approach to reforms so kind of neither all in or neither out as well. One manifestation of this that is probably worth pointing to is in China's housing market. So China now has an absolutely massive amount of unfinished floor space so the equivalent of seven billion square meters. So just to put that into kind of terms that you and I are more used to, that equates to 17 million houses in the UK. That's enough for every single one of us to have our own property and some. And as a consequence of all of this investment in infrastructure and also holding properties back into this construction phase rather than finishing them and releasing them onto the market, the consequence of that, it now takes seven years start to finish for a project to be done or declared as complete or vacant in China. Imagine a property taking that long to build in the UK. I dont know whether you have ever seen the show grand designs. It's just a TV program with typical people, normal people like you and me. They suddenly want to fulfill their dream homes. They're getting set about building them and as you can imagine, just regular people that are just absolute calamities. Very few take that long to complete the construction of and these are complete novices, not construction firms that are professional and doing this the entire time. And so it really goes some way to highlight the extent of the problem in China. But why are Chinese authorities choosing to have all of these properties just stuck in the construction phase? Well, for several reasons. So, first of all, it's a really handy way to keep resources tied up, especially in an economic downturn if you're worried about unemployment and social unrest. What better way than really to help people dig holes just to fill them back up again? It keeps resources busy and prevents social unrest. The other element is that it is a handy way to support the economy, to push in a downturn without weighing on property prices. So if all of these properties were to be completed and a glut of them, glut of finished property went onto the housing market, it would depress prices and property prices are really important to the social fabric of China's wealthy. So too are they to local authorities. So the way that China's managed that relationship is and for many, many years, the supply of property. So those completed or declared is vacant. China has lined it up so that they perfectly match the demand for those properties. So the time it takes to clear properties is one year, basically. More recently, things have become even tighter and the stock of ready to go properties and would clear in less than a year. But the problem is with all of this, is well, those resources aren't being used productively. We actually have a measure that we call our China Urban Underemployment Indicator. Rather than just looking at unemployment in China, we actually consider underemployment. So all of those workers aren't being used productively. And if our estimates are right, that's going to exceed 25 percent of the labor force this year. That's huge. So China's problem, I think, in light of Covid 19 has just become exaggerated or highlighted even more. Essentially, they've got this careful juggling act between maintaining growth and cushioning the downturn, preventing social instability or unrest. All the while trying not to burst the property price bubble that they've essentially put an implicit guarantee underneath. 

Roger Hirst [00:06:04] It would appear that fixed-asset investment, and in particular housing, rather than a rotation towards consumption, have continued to be the engines of growth for China. But this growth is really an ongoing credit expansion. A spare capacity that's equivalent to a house for every individual. Not just every household, but each individual in the UK is certainly a sobering thought. For more data, Fathom's China database and chartbook have been made available through their partnership with Refinitiv. We'll see you later with another update.