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. Chinese policymakers are taking action
After several years of economic weakness, Chinese policymakers recently announced the most aggressive package of stimulus measures since the Covid-19 pandemic in a bid to shore up the economy. While many of these policies have been implemented in isolation before, September’s announcement was significant given the coordinated approach with which a range of monetary and fiscal measures were announced. As our chart shows, in recent years, lowering rates and increasing liquidity has not boosted credit growth meaningfully as consumer confidence has remained subdued amid falling property prices. The broad package of monetary measures, alongside the promise of further fiscal stimulus to boost demand, is the clearest indication yet that policymakers stand ready to support the economy. It will be important to monitor the scale of fiscal support that is delivered in the coming months, and whether this translates to a sustained improvement in the macro backdrop.
2. Consumer confidence has been 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. As our chart shows, consumer confidence remains weak and is yet to recover to pre-pandemic levels. The 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. Policymakers will now be hoping that the recently announced stimulus measures help consumers to find their feet.
3. The property sector has been 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. As our chart shows, property prices have fallen sharply as demand has weakened, and a number of high-profile real estate developers have defaulted. Despite the recently announced stimulus measures, a sustained resolution for the problems in the real estate market will take time given the inventory overhang and uncertainty around future property prices. If there are signs of an improvement in the housing sector over the coming months, this could play an important role in bolstering consumer sentiment.
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. Policymakers are now showing increasing willingness to implement more significant support measures to shore up the economy. While there are undoubtedly still challenges facing the world’s second largest economy, in our view, the worst may now be behind us.