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Measure by Measure – Assessing Policy Support Across Asia

Despite the recent challenges in China’s property sector, it is worth pausing to consider the generally upbeat economic newsflow across the wider region.

Asia Pacific Head of Fixed Income, Head of SSGA Singapore

In recent months, the challenges faced by several large China-based property groups have generated pessimistic headlines, as some real estate companies defaulted or requested debt-repayment extensions1. While such developments reflect entrenched issues in this market segment, they can distract from Asia's more favorable economic environment. For instance, inflation is moderating, and interest rates in many markets are now firmly paused, with the potential for reductions on the horizon.

In this article, we first look at China’s targeted policy measures to support its property sector. We also explore whether similar moves are needed in other Asian territories and how the trajectory of US interest rates will shape the region’s economic outlook.

China Real Estate – A Targeted Approach

China’s property sector accounts for around a quarter of its economic activity, unsurprisingly raising concerns about debt problems seeping into the financial segment2. The government has undertaken several measures to contain or limit any damage from a debt-laden real estate market.

For instance, we have seen mortgage rates reduced to a record low and preferential loans for first homeowners3. The city of Nanjing has lifted housing curbs, meaning prospective homeowners can now buy property without proof of eligibility. Previously, people were limited vis-à-vis where they could buy and how many assets they could own. Price caps may also be removed from new homes, allowing developers to reduce or increase prices, which should help loosen and stabilize the market. Other cities in China are expected to remove price curbs in the future. These measures should help developers reduce their debts to more manageable levels.

Some investors have questioned the timeliness and sufficiency of recent moves, especially compared to previous support packages4. Yet, it’s important to realise that the government’s incremental actions do not stem from a reluctance to intervene. Instead, they reflect a more targeted approach to reduce China’s overall debt levels and steadily contain property's impact on the wider economy5.

Do Other Markets Have Property Sector Issues?

Vietnam has also experienced issues with its real estate sector. Apart from China, it is the only other market in the region to reduce its official interest rates in recent months. The government in Hanoi has also launched an anti-corruption drive that investigated land transfers between real estate companies, sparking fears that developers may not have full legal ownership of land needed for projects6. In general terms, the property sectors of most Asian markets did not experience the same level of growth seen in China, meaning any reversal in fortune is smaller in scale and impact.

How Will Problems in China Affect the Wider Region?

The main impact is indirect. As China’s economic growth slows or cautious consumers adjust their spending patterns, the potential demand for products and services from other regional markets could be curtailed. A harder-to-quantify impact may be on investor sentiment, which may weaken enthusiasm for the Asian region. Such a reaction is natural, but upon further assessment, investors may view China’s challenges as distinct from the opportunities available in Asia’s other economic sectors and markets.

Interest Rates on Pause as Inflations Softens

Except for Thailand, which raised its main interest rate by 0.25% on 2 August 2023, interest rates have remained broadly on hold across the rest of the region7. This has been possible because inflation has softened amid higher borrowing costs weighing on investment and consumption. In previous quarters, interest rates were also hiked quite aggressively in many markets.

It also worth noting that local-currency government bond yield curves in Asia generally moved higher between 1 June 2023 and 31 August 20238. The Asian Development Bank, in the September 2023 issue of its Asia Bond Monitor, reported that local-currency bonds outstanding in emerging East Asia totalled USD 23.1 trillion at the end of June 2023, an increase of 7.9% from a year earlier – this is equivalent to 63.1% of the US bond market and 114.2% of the EU-20 bond market9.

US Federal Reserve (Fed) Rate Changes and Asia’s Bond Markets

The recent interest-rate holding pattern witnessed across much of Asia reflects how the pace of Fed interest rate tightening has slowed. The Fed needs to bring inflation closer to its longer-term target of 2%, but it is also conscious of labor-market conditions and international developments. The Fed's most recent ‘dot plot’ shows that it expects interest rates to stay around 3.5% by 2025 and approximately 2.5% in the long run10.

Most central banks in Asia will probably follow the Fed regarding interest-rate movements, which means the next shift in regional borrowing costs may be downwards. This should help boost consumption and investment, thereby bolstering economic growth in the region.

Overall, investors should perhaps look through the specific problems affecting China’s property sector to avoid forgoing opportunities that could capture diverse and appealing investment prospects in non-property sectors across Asia.

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