• Consumption Trends – Success in controlling recent COVID outbreaks sees retail sales picking up. But the rebound is weaker than expected, possibly correlated to declining home sales and slowing household income growth. Upward pressure on consumer prices continues to intensify. This will likely bear negative impacts on consumer sentiment in the near-term.

• Trade Trends – China’s strong export growth continues but is now driven primarily by rising prices. Growth in export volumes has started to decline. A significant drop in export growth is expected in 2022. The RMB exchange rate is holding up strongly due to China’s enormous trade surplus and some slight improvements recently in US-China trade relations; specifically, the two sides are talking more.

Implications for Business

On October 23rd, the National People’s Congress unexpectedly approved a new trial on property taxes, which will be applied to a selected group of cities and last for five years. This comes at a time when numerous developers, Evergrande most prominently, are on the brink of collapse due to insolvency – the inability to service their debt. Property taxes have long been discussed but never implemented at scale. They make sound economic sense as a means to reduce speculation, generate needed fiscal income, reduce wealth inequality, and incentivize capital reallocation. But the near-term impacts could be brutal. A correction in housing prices could eventually trigger a significant decline in new housing sales (albeit there would likely be buying-on-the-dip dynamics along the way); and this would impact all the economic activity related to real estate activity, both upstream and downstream. Consumer spending would likely decline as a function of the negative wealth effect. Credit would likely become more constrained given the use of real estate as collateral for over 40% of borrowing in China.

Much will depend on how the property tax program is designed and implemented. For this we’ll need to wait and see. It is expected that the government will go slow on implementation; but still, the execution risks are enormous. Given the enormity of the real estate sector in China, its importance to the overall economy, and all the contingencies involved, it will be a significant challenge to manage a soft and smooth transition. Members should monitor this space carefully and prepare for a possibly volatile adjustment.