Aurelia Butler

SEOUL (Reuters) – South Korea’s exports likely extended their falling streak to a third straight month in December, a Reuters poll showed on Wednesday, with demand from China yet to recover from loosening COVID-19 restrictions.The country’s outbound shipments were projected to have fallen 10.1% in December from the same month a year ago, according to the median forecast of 12 economists.That would be the third straight month of year-on-year declines, after a 14.0% loss in November, which was the biggest in 2-1/2 years, and 5.8% in October. “South Korea’s exports are under pressure from declining exports to China, where the economy still remains sluggish even after easing of its COVID-19 restrictions, and weak sales of IT products, mainly semiconductors,” said Park Sang-hyun, chief economist at HI Investment and Securities.”Moreover, global economic slowdown is materialising, so exports are likely to continue the falling trend for the time being.”China has eased some of its most stringent restrictions to fight COVID-19 since last month. During the first 20 days of December, South Korea’s exports shrank 8.8% from the same period a year ago. Those to China dropped 25.5%, outweighing gains in U.S. and EU-bound shipments, in likely the seventh consecutive falling month.Meanwhile, imports were expected to have fallen at a much milder pace of 0.6% in December, after a 24-month gaining streak through November. Altogether, the trade balance is set to remain in deficit for a ninth consecutive month. It is also on track for the first annual shortfall in 14 years and the largest-ever.Full monthly trade data is scheduled for release on Sunday, Jan. 1, at 9 a.m. (0000 GMT).The survey also forecast the country’s consumer price index for December to be 5.0% higher than a year ago, the same as in November, when the annual inflation rate hit a seven-month low.On factory output, economists expected production to have fallen 0.8% on a seasonally adjusted monthly basis, which would be slower than 3.5% in October and the slowest in likely its five-month falling streak. More

When inflation reached an almost unthinkable 20 per cent this year in Lithuania, residents in the rural south of the Baltic country began to tighten their belts.“People are buying less. It’s hard. Everybody is trying harder, wearing what they already have more, shopping less,” says Laima, a 58-year-old woman who sells socks and other clothes from the boot of her car.Across the main road in Sangrūda, a sleepy village of 200 people close to the border with Poland, it is the same story at the Aibė grocery store. “When the war broke out, people’s purchasing power dropped and they started saving money,” says Gintarė, the 32-year-old cashier. “Fuel and heating became more expensive, electricity, taxes . . . And food was left as the last thing to think of. People take what is most important now, cheaper goods, discounted ones.”Inflation has been on the rise across the west to levels last seen decades ago, but few places have experienced a rise in prices quite like Estonia, Latvia and Lithuania, where inflation rose above 20 per cent this summer and is still above 21 per cent in all three countries.While there are local factors that explain some of the surge, policymakers in the Baltics warn that the region is providing an early indicator of how price pressures could develop across Europe over the next year, even if the headline rate of inflation peaks. Aibė grocery store. ‘When the war broke out, people’s purchasing power dropped and they started saving money,’ says Gintarė, the store’s 32-year-old cashier © Tadas Kazakevicius/FTMārtiņš Kazāks, Latvia’s central bank governor, says the Baltics are a “canary in the coal mine” for the wave of inflation hitting Europe.It is a worrying message for other European countries, where inflationary pressure could remain high over the winter and spring as energy price rises feed through. “We have front-loaded most of the external shock already,” adds Kazāks. “In other countries, it is still being passed through.”Economists in the Baltics report how experts from other European countries are amazed by the seeming acceptance with which the public have greeted such extreme inflation. “Colleagues from abroad ask me: why are there no protests?” says Greta Ilekytė, economist at Swedish lender Swedbank, the biggest bank in the Baltics.The Baltic states have two big advantages that most other western countries do not, say policymakers. First, they have experienced relatively high inflation for several years amid strong wage growth as their economies catch up with the rest of Europe, meaning that the sudden jump came as less of a jolt. And second, memories of their forced occupation by the Soviet Union for decades means they are more accepting of the consequences of Moscow’s current brutality in Ukraine, even if there are some worries about the potential for populists to exploit the situation.Lithuanian prime minister, Ingrida Šimonytė: ‘It would be very hard to gain major support among the population here for the idea that, “It’s because stupid governments have imposed sanctions on Russia, this is why you’re paying high prices”.’ © Tadas Kazakevicius/FT“This understanding is significantly stronger here than in other parts of the world,” says Ingrida Šimonytė, Lithuania’s prime minister. “It would be very hard to gain major support among the population here for the idea that, ‘It’s because stupid governments have imposed sanctions on Russia, this is why you’re paying high prices’.”Recent experienceInflation had already been picking up in the Baltic countries, well before Russia’s full-blown invasion of Ukraine in February. Estonia, Latvia and Lithuania all had inflation rates close to zero at the start of 2021 but by this January they were up to 7.5-12.3 per cent, well above the eurozone average.Unlike much of Europe, the Baltic countries also have recent experience of high inflation, such as in 2008, when Latvian inflation hit 18 per cent, which means the latest price surge has had less of an impact on the national psyche.“In 1992, when we had just regained our independence, inflation hit 950 per cent,” says Kazāks. “It is not like Germans who have not seen double-digit inflation for generations. We know it is nasty, but it is not like we have never seen it before.”Gediminas Šimkus, head of Lithuania’s central bank, points out that people’s living standards have risen dramatically in recent years, making it easier to absorb the recent reversal in purchasing power, helping to explain why the Baltics have avoided much of the protests and strikes seen elsewhere in Europe. ‘Everybody is trying harder, wearing what they already have more, shopping less,’ says Laima, a 58-year-old woman who sells socks and other clothes from her car boot © Tadas Kazakevicius/FTWages have doubled in Lithuania since it joined the euro in 2015, while consumer prices are up only 40 per cent in that time. “Living standards have been getting much higher,” says Šimkus. “So there is an economic explanation why you still don’t have riots.” Ilekytė points out that Lithuania is now richer — on a GDP per capita basis, adjusted for purchasing power — than Spain, Portugal or Greece and not far behind Italy.The recent crisis has only increased public support for the euro despite criticism elsewhere on the continent of the European Central Bank’s slow response to surging inflation, according to Šimkus. “Being a member of the euro area is a support for our safety. It is not only about economics and convergence. It is also a certain guarantee for our independence. That is how it is perceived. It is an extra layer of protection,” he adds.The central bankers say inflation rose faster in the Baltics due to a number of differences with the rest of Europe, including the greater use of spot energy prices rather than the longer-term, fixed contracts that companies have in much of Europe. “So we see this reaction coming much quicker. For other euro area countries, the full effects are still to come,” Kazāks says.Gediminas Šimkus, head of Lithuania’s central bank, says inflation is higher in the Baltics because people on average earn less than in much of Europe © Ints Kalnins/ReutersŠimkus says inflation is also higher in the Baltics because people there on average earn less than in much of Europe, meaning they spend a bigger proportion of their income on essentials like energy and food, for which prices have risen furthest.“Expenses for heat energy are almost four-times higher as a share of income in Lithuania than in the euro area,” he says. “Expenses for solid fuels are almost three times higher.” Lithuania’s central bank calculated this difference made local inflation 2 percentage points higher than the rest of the eurozone.There is still plenty of concern among the local population, especially over what will happen through the winter. “Inflation has done its job — what we use to grow flowers has become very expensive. For us, our costs have doubled compared with two years ago,” says Raimonda Skeberdienė, the 33-year-old owner of a small flower farm on a dirt track outside Sangrūda.Vida, a neighbouring 63-year-old farmer, adds: “Everybody is feeling inflation. Not everyone earns a good salary, so it’s hard for people. We went to the shops today and there were not many people. They used to buy anything. But now they are choosing what to buy.”The Baltic governments have responded like most in Europe by offering support schemes to damp the effect of the price increases, especially in energy. “You need to see where the balance is between what you can pass on to consumers and what you can compensate with excess borrowing by the state. Nobody is happy,” says Šimonytė.So far, there has also been relative political unity, with most parties not wanting to give Russia a propaganda victory by protesting too much. “We can’t play around and use anything we get as a weapon to beat our opponent,” says Gintautas Paluckas, parliamentary leader of the opposition Social Democrats in Lithuania. “It’s a matter of a common threat we are facing and on important issues we stand together. Our political system is still in its infancy and will not allow foreign agents to bring in a fight.”But there are worries about more extreme forces brewing. In Estonia, the far-right party Ekre has cemented its position as the second-biggest political force in the country behind the Reform party of prime minister Kaja Kallas ahead of parliamentary elections in March. Pollsters attribute much of Ekre’s recent gains to angst about the rapid rise of inflation. Margarita Šešelgytė, director of the Institute of International Relations and Political Science at Vilnius University, says that in Lithuania one of the most popular politicians in recent polls is Ignas Vėgėlė, a lawyer who has attracted attention for his anti-vaxxer comments on Covid-19. “It will have political consequences. We have some radical forces that are on the rise,” she adds.Still, the war in Ukraine offers a powerful antidote to protests in these countries on the frontline between the west and Nato on one side and Russia on the other, three decades after they regained their independence from the Soviet Union. “There is this realisation: let’s not complain too much, at least we don’t have war. The realisation we could have war here is much higher than in countries further away from Russia. Here it’s very vivid,” says Šešelgytė. Ilekytė, adding: “Our memories of the Soviet Union are still alive. If you are going to protest, then what are you protesting against? Ukraine probably.”Signs of economic stressThere are already signs that these price pressures are taking their toll on the Baltic economies. Estonia and Latvia have been the weakest performers out of the 19 euro area members so far this year, after their economies contracted 2.3 per cent and 0.4 per cent respectively in the third quarter from a year earlier.The slowdown has been particularly acute in the industrial sector, where production fell 5.8 per cent in the year to October in Estonia and 2.7 per cent in Latvia. While Lithuania’s economy has held up better, its 2.5 per cent growth in industrial output in the same period was below 3.5 per cent growth in the overall eurozone. One of the biggest political issues is the price of heating over winter as each government faces questions over how much financial support to offer. “I burn mulch. Of course, I feel the price increase. The price of materials has also gone up,” says Algis, a 78-year-old who works in Sangrūda’s modest thermal power station that heats the local school, foster home, and other municipal buildings.Some politicians in the region believe that the potential problems from higher inflation are easier to manage than they would be in many other parts of Europe. “It is easier here. In other countries, where I see double-digit inflation in the old eurozone countries, where you know the labour market is rather stable and the wage growth is rather different from what we have in this part of Europe, it is probably much more pressing,” says Šimonytė.She adds that Lithuania is still protected by dint of it still catching up with the European average in economic terms: “We’re in a more comfortable position as a converging country. But you still need to be vigilant because it is easy to blow the public finances.”The high wage growth of the Baltic region sets it apart from much of the rest of Europe over the past decade and boosts its ability to cope with the current period of unusually high inflation, according to economists. In Lithuania, wages have almost trebled in the past decade, while they have risen about 95 per cent in Latvia and 85 per cent in Estonia, according to Eurostat, the European Commission’s statistics agency. But in the same period, EU wages are up only 26 per cent.Algis, 78, who works in Sangrūda’s modest thermal power station, says he feels the price increase © Tadas Kazakevicius/FT“Here in Sweden, we are lucky to have 1 or 2 per cent real wage growth in a good year,” says Jens Magnusson, chief economist at Swedish bank SEB. “But in the Baltics they’ve had 6 or 7 per cent real wage growth for several years and that provides a cushion to make it easier to cope with such high inflation now.”In countries like Germany, which until this year had not experienced double-digit inflation since 1951, such rapid price rises are more of a psychological shock than in the Baltics, where such inflationary bursts are a more frequent occurrence.“Inflation of 10 per cent in the rest of Europe is at least as impactful and difficult as 20 per cent inflation in the Baltics,” Magnusson says, pointing out that their relatively low levels of government debt gave Baltic countries more fiscal leeway to provide support to those hit hardest by high energy and food prices.There was widespread relief among central bankers after eurozone inflation fell from its record high of 10.6 per cent in October to 10.1 per cent in November — its first decline for 17 months. “When I look at the inflationary pressures in the euro area it resembles what we experienced in Lithuania six months ago,” Šimkus says, adding that the “peak of headline inflation in the euro is probably just around the corner”. Ilekytė says she still forecasts inflation will be 8-9 per cent in 2023.But Lithuania’s central bank governor adds that even if wholesale European energy prices do not return to their recent record highs, the cost of many goods and services will keep rising at well above the ECB’s 2 per cent target for an uncomfortably long period. “I think the pass-through of these energy impulses into final goods and services is still to be seen,” he says. “That is exactly what worries me.”

Officials in both the Baltics and the rest of Europe worry that the surge in inflation will leave behind traces for years to come. “This is not a passing shock,” says Latvia’s central bank governor, Kazāks. “This is a permanent shift, which requires structural solutions.” He says the EU needs to come up with a coherent and ambitious energy strategy: “If we are unable to ensure that our economies get access to affordable energy, we will start losing companies that are energy intensive and they will relocate and that will have consequences in terms of unemployment and lower growth.” Additional reporting by Urtė Alksninytė in Sangrūda More

The eurozone economy is set to shrink next year as high inflation and potential energy shortages drag down output and trigger a reversal in the fortunes of the labour market, according to a Financial Times poll of economists.Almost 90 per cent of the 37 economists surveyed by the FT said they thought the single currency zone was already in recession and the majority forecast gross domestic product would contract over the whole of next year.“Gas markets in Europe remain a key risk,” said Chiara Zangarelli, an economist at Morgan Stanley. “Additional supply disruptions, or a particularly cold winter, could lead to renewed tensions and prices rising again, forcing another round of adaptation and demand destruction.”Most economists said they thought Europe was past the worst of its energy crisis, sparked by Russia’s invasion of Ukraine. A mild autumn allowed natural gas storage facilities to remain near to full capacity.However, many fear the prospect of energy rationing could return next year, particularly if this winter is unusually cold, depleting supplies, or if gas flows from Russia are reduced further during 2023. “The tail risk of gas rationing has likely been avoided for this winter, but the question of energy supply for the next winter is still open,” said Sylvain Broyer, chief economist for Europe Middle East and Africa at S&P Global Ratings.European countries have managed to lower their dependence on Russian gas imports by turning to Norway, the US and the Middle East, along with switching to alternative energy sources. But economists warn that, without Russian supplies, it will be much harder to refill Europe’s crucial gas storage facilities ahead of next winter.“Gas storage levels are dropping quickly now,” said Carsten Brzeski, head of macro research at ING Bank. “There is still the risk of an energy supply crisis this winter. Moreover, next winter will be even more challenging.”The downturn in the economy, combined with significantly higher mortgage costs across Europe, was also expected to trigger a sharp reversal in the region’s housing market. The European Central Bank raised rates by 2.5 percentage points over the course of 2022 and is expected to increase borrowing costs further in 2023. On average, economists forecast eurozone residential house prices would fall 4.7 per cent next year. Maria Demertzis, senior fellow at the Bruegel think-tank, said house prices “will not continue to increase if we are in a recession and interest rates increase”.The economists polled by the FT forecast the eurozone economy would shrink by just under 0.01 per cent next year. That is more pessimistic than both the European Commission and the ECB, which predicted the bloc’s economy would grow by 0.3 per cent and 0.5 per cent next year respectively.Marcello Messori, an economics professor at Luiss University in Rome, said further interest rate hikes by the ECB to counter the “excessive inflation” that was caused by the energy supply shock stemming from Russia’s invasion of Ukraine would “lead to a severe recession in the euro area”.Inflation in the eurozone is expected to remain above the ECB’s 2 per cent target for at least two more years, according to the economists. On average, those polled expect prices to rise by just over 6 per cent next year and almost 2.7 per cent in 2024.Those forecasts are lower than those of the ECB, which earlier this month predicted price growth would average 6.3 per cent next year and 3.4 per cent in 2024.Wage growth is expected to be 4.4 per cent next year, according to the average prediction in the FT poll, which is below the 5.2 per cent forecast by the ECB.On average, economists forecast unemployment would rise from a record eurozone low of 6.5 per cent in October to 7.1 per cent at the end of next year. More

The writer is managing director at Crossborder Capital and author of ‘Capital Wars: The Rise of Global Liquidity’It has been a bleak year for many investors. Global investors have lost $23tn of wealth in housing and financial assets so far in 2022, according to my estimates. That is equivalent to 22 per cent of global gross domestic product and uncomfortably exceeds the lesser $18tn of losses suffered in the 2008 financial crisis.Hopefully though, next year will not be so bad for assets, because the cycle of global liquidity is bottoming out. Part of my reasoning is that quantitative easing programmes by central banks to support markets are impossible to reverse quickly because the financial sector has become so dependent on easy liquidity. The very act of quantitative tightening creates systemic risks that demand more QE. We track the fast-moving, global pool of liquidity — the volume of cash and credit shifting around financial markets. The impact of the ebb and flow of this pool, currently about $170tn, can be seen in the central bank programmes to support markets through the Covid-19 pandemic — quantitative easing. The latter drove another “everything up” bubble through 2020-21. But as soon as policymakers hit the brakes in early 2022 and triggered a near-$10tn liquidity drop, asset markets collapsed.We focus on liquidity because the nature of our financial system has changed. The markets no longer serve as pure capital-raising mechanisms. Rather they are capital refinancing systems, largely dedicated to rolling over our staggering global debts of well over $300tn. This puts a premium on understanding collective balance sheet capacity to finance debt issues over analysis of the cost of capital.We estimate that for every dollar raised in new finance, seven dollars of existing debts need to be rolled each year. Re-financing crises hit us more and more regularly. Hence, the importance of liquidity.So, what now? According to our monitoring of liquidity data, we have just passed the point of maximum tightness. The two most important central banks driving the global liquidity cycle are the US Federal Reserve and the People’s Bank of China. Think of the Fed as mainly controlling the tempo of financial markets, given the dominance of the dollar, whereas China’s large economic footprint gives the PBoC huge influence over the world business cycle. In short, the stock market’s price-earnings multiple is determined in Washington and its earnings Beijing.The Chinese market enjoyed a large jump in liquidity injections in November, led by the start of an easier monetary policy from the PBoC. Contrary to the consensus view, latest data also show the US Federal Reserve adding back liquidity into dollar markets, despite its ongoing QT policy.Admittedly, the Fed has reduced its holdings of US Treasuries in seven of the past nine weeks as part of QT. But net liquidity provision, benchmarked by moves in the Fed’s “effective” balance sheet, has remarkably risen in six of these weeks. In fact, the Fed added an impressive $157bn to US money markets through its operations.Looking ahead, we project a further pick-up in global liquidity. China desperately needs to boost its lockdown-hit economy, so expect further policy stimulus in 2023. Two other favourable factors are the lower US dollar and weaker oil prices. We estimate that each percentage point fall in the dollar increases the take-up of cross-border loans and credit by a similar percentage amount. The US currency is already down a hefty 9 per cent from its recent peak. The fall in oil prices to below $80 a barrel should also help, reducing the amount of credit required to finance transactions.But there could be more. The US Fed plans to reduce its holdings of Treasury and government agency securities by $95bn per month. But other items are likely to offset some of, perhaps even, all of this.First, the $450bn Treasury General Account, the US government’s deposit account at the Fed, is likely to fall as bills are paid ahead of difficult upcoming debt ceiling negotiations. Second, the Fed’s $2.52tn “reverse repo” facility for providing short-term investment to parties such as money market funds could drop significantly. This is because there are hints that the Treasury will issue more bills, debt of less than one-year maturity, relative to bonds which have longer terms.Third, rising interest rates mean the Fed will pay out more on debt it has issued. This could amount to a whopping $200bn over 2023. The September turmoil in the UK gilt market was a reminder of the risks of financial instability when liquidity is withdrawn. Mindful of such forces, could the Fed be reluctant to push liquidity down too much? One could argue that by winding back its portfolio of Treasuries (“official QT”), but allowing effective liquidity provision to rise (“unofficial QE”), the Fed is trying to have its cake and eat it! Whichever, it surely shows that QT is harder to achieve in practice than in theory. Stealth QE may be back next year and make what looks to be a difficult year feel a tad better.An editing error in this article has been corrected to state the correct $170tn figure for the estimated global liquidity pool.   More

Prices in the Asian financial hub were weighed down by a weak economic outlook and rising mortgage costs, following a serious COVID outbreak at the beginning of the year.November’s fall in home prices came after a revised 2.7% drop in October. Home prices in Hong Kong have fallen 13.8% in the first 110 months of the year. Transaction volume for the year is expected to fall to a decade low but it could have a small bounce next year after authorities lift travelling restrictions with mainland China, property agents said. For 2023, real estate consultancy Cushman & Wakefield (NYSE:CWK) expects home prices to be 0-5% lower than this year, with prices stabilizing in the second half after an expected peak of interest rates. Another consultancy, JLL, expects prices to fall another 10% next year for the mass market. It said a high level of inventory for developers due to a surge in unsold units this year would drive developers to offer discounts.The selling prices of some recently launched projects were 7% to 13% lower than the average price of the secondary market in the same area, JLL added.Last week, major developer CK Asset Holdings, owned by the city’s richest man Li Ka-shing, won a residential land plot in the downtown Kai Tak area for a price much lower than market expectations. Surveyors said the floor price represented an eight-year low in the area. More

TOKYO (Reuters) -Japanese factories slashed output for a third consecutive month in November, dragged down by weak demand for machinery products amid a deteriorating global economic outlook.The weak production bodes ill for Japanese firms as they face growing calls to raise workers’ pay to counter inflation, seen as essential for the post-pandemic growth of the world’s third-largest economy.”The impacts of overseas rate hikes, slower growth and weak capital expenditure demand are gradually reaching Japan,” said Masato Koike, economist at Sompo Institute Plus.”Production inevitably remains weak for October-December and highly likely stalls furthermore as the global economy hasn’t hit its worst.”Factory output fell 0.1% in November from the previous month, government data showed on Wednesday, a smaller decline than the median market forecast for a 0.3% drop.That marked the third monthly decrease in Japanese production and followed a revised 3.2% fall in October and 1.7% contraction in September.Output of general machinery slipped 7.9%, while that of production machinery decreased 5.7%, driving down the overall index in November. Output of auto products was also down 0.8%.A Ministry of Economy, Trade and Industry (METI) official told a media briefing that machines to make semiconductors or flat-panel displays saw lower demand across overseas markets such as China, Europe and North America.METI cut its assessment of industrial output for a second straight month, saying “production is weakening”.Manufacturers surveyed by METI expect output to gain 2.8% in December and decrease 0.6% in January, but production could continue falling, the official added, saying companies tend to downgrade their production plans afterwards in recent months.Following a surprise contraction in July-September, economists expect Japan to grow an annualised 3.3% in October December on robust domestic demand, the latest Reuters poll showed.But inflation at a four-decade high is testing the resilience of consumer spending. Japanese retail sales fell month-on-month for the first time in five months in November, official data showed on Monday.Businesses are not sanguine either. Last week, the government warned of supply chain risks from China’s COVID-19 surge, while the Bank of Japan (BOJ)’s surprise tweak to its yield control policy stoked uncertainties for some lenders.Japanese companies head into annual labour talks for 2023 early next year. Substantial wage hikes are seen as necessary for the BOJ’s exit from ultra-loose easing.The wage hikes next year could end up “neither too high or too low”, Sompo’s Koike said, as strengthening prospects for pay raises are offset by a darker global economic outlook.”Japan’s real wages are unlikely to show extraordinary growth, which could prevent the BOJ taking drastic measures to exit monetary easing.” More

TOKYO (Reuters) -Bank of Japan (BOJ) policymakers saw the need to keep ultra-low interest rates but discussed growing prospects that higher wages could finally eradicate the risk of a return to deflation, a summary of opinions at their December meeting showed.At the Dec. 19-20 meeting, the BOJ kept its ultra-easy policy but shocked markets with a surprise tweak to its bond yield control that allows long-term interest rates to rise more.Several in the nine-member board said the decision was aimed at making the current stimulus programme more sustainable by addressing its side-effects and wasn’t a first step toward ending ultra-loose monetary policy, the summary showed on Wednesday.But discussions at the board delved into signs of change in Japan’s price outlook that could lay the groundwork for an eventual withdrawal of stimulus as dovish governor Haruhiko Kuroda’s second, five-year term draws to an end next year.While some said Japan has yet to sustainably hit the central bank’s 2% inflation target, others saw growing signs of change in companies’ prolonged aversion to raising wages and prices.”Price rises are accelerating not just for goods but for services … There’s a chance Japan’s inflationary momentum is heightening,” one member was quoted as saying.Another opinion said Japan could be seeing conditions fall into place to sustainably shake of the risk of a return to deflation, the summary showed. More

More than a year after China’s property crisis began, the government has finally changed its tune on the best way to overcome it.In its initial stages, which were dominated by the default of heavily indebted real estate developer Evergrande and a host of its peers, widely held expectations of government support failed to materialise.The liquidity problems had in part arisen because of Beijing’s attempts to discourage the excessive borrowing that had for years dominated real estate development. Companies unable to borrow new money as markets froze on the spectacle of Evergrande’s excess defaulted on the old and construction activity slumped.But in November this year, as concerning housing data continued to emerge, authorities appeared to reconsider the dangers of debt. The government unveiled 16 support measures for the property sector. Then state-run banks pledged an eye-watering amount — around $256bn according to S&P — in potential credit to specific developers.The message of an industry divided between the good and the bad was reiterated this month at the country’s Central Economic Work Conference, where policymakers pledged to support “high-quality leaders” and their balance sheets.These include companies such as Vanke, which is partly owned by the subway operator in the city of Shenzhen, and Country Garden, the biggest developer in the country by sales. Jens Presthus, an associate director at advisory group Global Counsel, notes that Vanke’s part state ownership has already allowed it to borrow at lower rates than peers. One potential use of the vast funds earmarked for them is mergers and acquisitions, potentially allowing them to snap up the land or assets owned by failed peers, bailing out the assets if not their previous owners or creditors.This kind of state-encouraged private-sector consolidation is typical of financial crises, as when JPMorgan agreed to buy Bear Stearns and the assets of retail bank Washington Mutual during the 2008 financial crisis. But while a collapse of financial institutions posed a spiralling threat to the entire financial and payments system, the collapse of Chinese real estate developers has so far been largely confined to that sector in its effects.Despite the new wave of government support, the latest data in November still paint a grim picture. Property investment fell 20 per cent year-on-year. Property sales fell by a third in both volume and value in November year on year. Ting Lu, chief China economist at Nomura, notes that the rate of decline in sales did improve in a 30-city sample in the first half of December, but believes it could take a few more months for the sector to recover. The zero-Covid apparatus that is now being relaxed may, with its lockdowns and bureaucracy, explain in part why the sluggishness in real estate dragged on for so long.Until now, the official response has been to encourage the completion of housing projects, given that homebuyers in China typically pay for new apartments before they are completed. This has often required the help of local governments, who were already under significant financial pressure because of the loss of revenues from land sales to developers.The government’s so-called “three red lines” policy, introduced in the summer of 2020, sought to constrain developers. It came at a time, now easily forgotten, when stimulus and monetary loosening to ward off the economic hit from Covid-19 had prompted a boom in both the stock and property markets in China.The new funds pledged by state-owned banks amount to credit lines that stand available, rather than an immediate lending splurge. They differ in legal convention from the international debts that some developers took on and which were at the centre of the crisis.If the flood of money is unleashed, it would amount to a significant undoing of a new creed of restraint on borrowing. But ultimately new lending will not be easily deployed unless there is a major recovery in demand for housing — what Harry Hu at S&P Ratings has called a “buy-in from end-customers”. Lu at Nomura notes that medium- to long-term household loans were Rmb210bn in November, less than half their level a year earlier. The big question is whether Chinese homebuyers, rather than the Chinese government, have also changed their minds about debt and [email protected] More