The Chinese economy has struggled in recent years. We’ve taken three charts from the Guide to the Markets to explain China’s economic weakness, and to highlight the key indicators that investors can track for signs of an improvement in the macro backdrop.
1. Consumer confidence remains weak
The removal of China’s zero-Covid policy at the end of 2022 led many economists to anticipate an immediate bounce-back for the Chinese economy, as its 1.4 billion population was set free from stringent Covid restrictions. Instead, what we’ve actually seen is a hesitancy among Chinese consumers to start spending again. Consumer confidence remains weak and is yet to recover to pre-pandemic levels. Our consumer income and wealth effect chart illustrates why this may be the case. Chinese households have broadly three sources of wealth available to them: property, stocks and their income. The ongoing slump in the property sector has had a profound impact on overall sentiment given 60% of Chinese household wealth is tied up in property. The poor performance of Chinese stocks over the last couple of years has exacerbated this negative wealth effect for those invested in the domestic stock market. Chinese households are also increasingly less confident about their future income prospects. More robust support measures from the government are likely required for consumers to find their feet.
2. The property sector remains a drag
For decades the booming real estate market had been key to China’s stellar growth. However, reforms by Chinese policymakers to discourage use of real estate as a speculative investment, alongside a crackdown on highly-leveraged developers, have put the sector under major pressure. Property prices have fallen sharply as demand has weakened, and a number of high-profile real estate developers have defaulted. Our fixed asset investment chart illustrates the weakness in real estate investment in recent years relative to other sectors. In an effort to stabilise the economy, a number of incremental policy measures have already been introduced. Some smaller Chinese cities have removed all home purchase restrictions, with larger cities expected to follow suit. State-owned banks have also announced a number of plans to provide increased credit support to developers. Yet with investment still depressed, we anticipate further stimulus ahead.
3. China has more room to ease policy relative to elsewhere
While there is no denying the headwinds facing the Chinese economy, it’s also important to note that policymakers in Beijing have more flexibility than their counterparts around the world. As our China inflation chart shows, China has been an anomaly in recent years by managing to avoid the inflation curse plaguing most other economies. In fact, the Chinese economy tipped into deflationary territory in the second half of 2023, and price pressures have remained depressed so far in 2024. Unlike central banks in other parts of the world, which need to remain vigilant to inflation, policymakers in China therefore have much more room to ease policy and stimulate the economy. As well as monetary support, China’s plans to issue $139 billion of ultra-long special central government bonds this year – only the fourth such sale of this type of bond in the past 26 years – signifies that greater support could be coming from a fiscal standpoint too. Encouragingly, there are now some tentative signs that this more accommodative policy is starting to have an impact. In the first quarter of 2024 the Chinese economy grew by 5.3% annualised, well above both consensus expectations and Beijing’s 5% target. Consumer confidence has also picked up in recent months, albeit from subdued levels. Although there are still challenges facing the economy, we will be watching closely for any indications of further stimulus that could lead to a more sustained improvement in the macro backdrop.
Summary
China’s consumption-driven economy has been particularly badly hit in recent years by an ailing property sector, which has knocked consumer sentiment given so much household wealth in China is tied up in property. Crucially though, we are already seeing tentative signs of improvement in the economic backdrop, with further policy support from policymakers still expected. There are undoubtedly still challenges facing the world’s second largest economy, but in our view, the worst may now be behind us.