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. As our chart shows, consumer confidence remains weak and is yet to recover to pre-pandemic levels. 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. 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. As our chart shows, property prices have fallen sharply as demand has weakened, and a number of high-profile real estate developers have defaulted. In an effort to stabilise the economy, several incremental policy measures have already been introduced. Beijing has announced various stimulus measures over the first half of 2024, including scrapping the floor for mortgage rates, reducing downpayment requirements and, most significantly, a new fund which will allow local governments to acquire excess housing supply and convert it to affordable housing. Yet with the property sector 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 – signify that greater support could be coming from a fiscal standpoint too. There are still challenges facing the economy but 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, further policy support from policymakers is expected to help consumers find their feet. There are undoubtedly still challenges facing the world’s second largest economy, but in our view, the worst may now be behind us.