In brief

• China reported stronger-than-expected GDP growth and economic activities in 4Q 2024, which were mainly supported by stimulus policies targeting consumption and front-loaded exports.
• The data pulse suggests some upside potential for Chinese economic recovery, while maintaining policy consistency should be crucial. A continuation of modest policy stimulus is expected in 2025.
• Investors remain cautious while uncertainties still loom in domestic stimulus and U.S. tariff policy. The short-term allocation might be biased on the defensive side, especially high dividend stocks, while opportunities might be emerging for active investment in selected sectors with strong policy supports and rebalanced supply-demand conditions.

A more balanced recovery in 4Q 2024

The Chinese National Bureau of Statistics (NBS) reported a year-over-year (y/y) real gross domestic product (GDP) growth of 5.4% in 4Q 2024, indicating a notable improvement compared to earlier quarters. The stronger fourth quarter growth data enabled China to achieve its annual growth target of 5% in 2024. In addition to the stronger GDP print, the GDP deflator increased by 1.92% y/y, marking the end of a six-quarter streak of deflation since 2Q 2023.

The stronger GDP growth in the past quarter was powered by a recovery in both local and external demand, in contrast to the biased growth structure with strong supply and weakening demand in previous quarters. Domestically, momentum remained strong in household appliances’ sales (+39.3% y/y in December), boosted by trade-in subsidies from local governments since September. Meanwhile, negative growth trend in automobile also reversed in 4Q 2024 (+0.5% y/y in December) thanks to fiscal incentives. As a result, the total retail sales growth rebounded to 3.7% in December.

Fixed asset investment also remained resilient, primarily supported by investment in manufacturing sectors (+9.2% y/y in December). Thanks to fiscal subsidies for industrial equipment upgrades, investment in equipment and tools increased by 15.7% y/y in 2024. Meanwhile, infrastructure investment was up by 9.0% y/y in 4Q 2024, mainly driven by railway, water and electricity sectors.

Externally, exports accelerated in December (+10.7% y/y), likely due to front-loading before potential tariff hikes by the U.S. Besides consumer goods, export of intermediate and capital goods also boomed as manufacturers diversified their supply chains to mitigate tariff risks.

On the supply side, in response to demand recovery, industrial production remained resilient (+6.2% y/y in December). The booming export of electric vehicles (EVs), equipment and green technology products may have driven stronger domestic production. That said, concerns about overcapacity persists, and higher trade barriers in the U.S. and European markets could have negative impacts in 2025.

Despite the recovery in economic activity, confidence remains a major challenge. In the real estate sector, investment activities continued to decelerate in December, which remained a major drag for aggregate fixed asset investment. The People's Bank of China’s (PBoC’s) social financing data also revealed weakness in corporate credit, suggesting the continued cautious sentiment among private sectors.

Policy consistency a major concern

The latest data release suggests some upside potential for Chinese economic recovery. As the economy has not experienced a deep and prolonged deflationary spiral, there is still potential for domestic consumers and business confidence to restore with the right policies in place. However, maintaining policy consistency should be crucial for a sustainable recovery. The Chinese stock market response was moderate after the data release, reflecting cautiousness among investors ahead of further policy clarity after the Chinese New Year.

Looking forward, our base scenario is a continuation of modest policy stimulus in 2025, which might help stabilize the economy, while challenges remain in driving a rapid rebound. Given the encouraging results of consumption subsidies, the Chinese government might reevaluate the approach to fiscal stimulus and allocate more resources to support households. Meanwhile, the coordination between monetary and fiscal polies might be further strengthened.

On the fiscal front, a budget deficit of 4% of GDP might be set at the National People's Congress annual session in early March, implying CNY 1.6trillion of additional deficit. Meanwhile, total government bond issuance might increase by CNY 2trillion. An important question beyond the total scale of fiscal spending is how to allocate the burdens among the central and local governments, as the latter is facing unprecedented challenges of declining fiscal revenue and mounting debts. If the central government could issue more bonds to alleviate local debt pressures, the sentiment might become more optimistic.

On the monetary front, the PBoC is expected to cut its reserve requirement ratio (RRR) and policy rates after the Chinese New Year holiday. Since 2023, the central bank is facing the challenge from low confidence and demand for credit from private sectors and households, which dragged credit growth despite the easing measures. Under such a circumstance, government financing might continue to play a key role in supporting credit growth.

The wild card exists in Trump's tariff policy and China's response. Given the intrinsic conflicts in Trump's policy targets for tariff, immigration and domestic inflation, it might be unrealistic to immediately enforce the proposed 60% tariff on Chinese exports. Meanwhile, it is also impractical for China to take a tit-for-tat strategy given the current economic challenges. Therefore, we are seeing some positive signals in the interactions between China and the Trump administration. If China responds to tariff threats by further opening its market and strengthening its economic ties with other major economies, there should be positive effects on boosting growth and stabilizing investor confidence.

Investment implications

After the market rally caused by monetary policy measures since September 24, Chinese stock valuations have hovered around the long-term historical averages (Exhibit 1) for three months. On one hand, this reflects that investor sentiment has shifted from being extremely cautious to relatively neutral. On the other hand, risk-averse sentiment may gradually accumulate due to a prolonged policy vacuum. In fact, the better-than-expected economic readings even raised concerns that future policy rollout might be delayed, or the scale might be reduced.

Exhibit 1: Chinese stock valuation recovered to a neutral level after stimulus in late September 2024
Valuation of CSI 300 index
Forward price-to-earnings, based on earnings consensus in next 12 months

Source: Bloomberg, Shanghai Stock Exchange, Shenzhen Stock Exchange, J.P. Morgan Asset Management. Past performance is not a reliable indicator of current and future results.
Data reflect most recently available as of December 31, 2024.

Against this backdrop, the short-term allocation might be biased on the defensive side, especially high dividend stocks in the China market. When uncertainties remain, the relatively solid fundamentals make high dividend stocks a hedge against down -side risks. In addition, as Chinese government bond yields edged down, long-term institutional investors are increasing their holdings in dividend stocks to generate income and might provide sustainable supports.

That said, opportunities might be emerging for active investment in selected sectors with strong policy supports and rebalanced supply-demand conditions. Global technological trend in artificial intelligence and automation might also become catalysts for stock prices. Beneficiaries might include sector leaders in robotics, semiconductors, consumer electronics, autonomous driving and related areas.

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