Pressured by the rising risk of a prolonged deflationary spiral, Chinese central policy makers suddenly shifted to a very proactive stance in late September and continued introducing stimulus measures in various areas.
In brief
- Chinese real GDP growth edged down to 4.6% in 3Q 2024 (2Q 2024: 4.7%) and deflationary risks sustained in the economy.
- Monthly data pointed to marginal improvement in consumption, fixed asset investment and industrial production, probably as a result of the supportive policies being implemented in September.
- Central policy makers suddenly shifted to a proactive stance in late September and continued introducing stimulus measures in various areas.
- Looking forward, the sustainability of market recovery relies on the prospects in economic growth and corporate earnings. This depends heavily on the scale and pace of subsequent fiscal policies.
Deflationary risks persist, while demand recovered mildly after stimulus
The Chinese National Bureau of Statistics (NBS) reported year-over-year (y/y) real gross domestic product (GDP) growth of 4.6% in 3Q 2024, slightly lower than the reading of 4.7% in the previous quarter. In addition to the continuing decline in growth rate, the GDP deflator stayed below zero (-0.71% y/y) for the sixth straight quarter since 2Q 2023. This pointed to prolonged deflationary risks, making it increasingly urgent for more resolute policy moves to revive consumer and business confidence.
In contrast to the soft quarterly readings, monthly economic activities lifted moderately in September, probably as a result of the stimulus packages being implemented more widely in September. Retail sales growth rebounded to 3.2% in Sep. 2024 (Aug. 2024: 2.1%), mainly driven by sale of household appliances (Sep. 2024: 20.5% y/y vs. Aug. 2024: 3.4% y/y) and automobiles (Sep. 2024: 0.4% y/y vs. Aug. 2024: -7.3% y/y). According to the Ministry of Commerce, CNY 13.17billion of subsidies were issued under the appliance trade-in scheme till October 15, which drove CNY 69.09billion of total sales. During September 01-25, more than 1.13million applications were submitted for automobile replacement subsidy, in comparison to 0.33million in August.
On the investment front, the subsidy to support industrial equipment upgrade might have contributed to a strong momentum in manufacturing fixed asset investment (Jan.-Sep. 2024: 9.2% y/y vs. Jan.-Aug. 2024: 9.1% y/y). Meanwhile, infrastructure investment remained resilient and increased by 9.3% y/y in the past nine months.
Industrial production increased by 5.4% y/y in Sep. 2024 (Aug. 2024: 4.5% y/y), mainly driven by strong growth in high-tech sectors. Export of electric vehicles, green technology products and capital goods continued to support domestic manufacturing. That said, headwinds might be rising as trade barriers increase for Chinese exports.
The real estate sector remained the primary source of risk. Housing prices in both primary and secondary markets continued to sink in September, down 6.1% and 9%, respectively, from one year ago. Developers are under sustained financing pressure as new residential property sales in the past nine months dropped 24% y/y. Although the latest policy easing boosted sales during the October long holidays, confidence remained weak among potential home buyers.
Stronger stimulus measures are expected
Pressured by the rising risk of a prolonged deflationary spiral, Chinese central policy makers suddenly shifted to a very proactive stance in late September and continued introducing stimulus measures in various areas.
The fist step was to boost confidence in asset prices in the stock and real estate markets. On September 24, the PBoC, joined by other financial regulators, announced RRR cuts, MLF rate cuts and establishment of liquidity schemes to support the stock market. Rates for outstanding mortgage loans were also reduced by 50 bps averagely to 3.35%, which might save CNY 150billion of interest expense for households. By advocating a “whatever it takes” approach, the central bank demonstrated strong capabilities in expectation management, which led to a pervasive rally in on-shore and off-shore markets.
After the long holidays, the National Development and Reform Committee, Ministry of Finance and Ministry of Housing and Urban-Rural Development held press conferences to introduce stimulus measures within their respective jurisdictions (Exhibit 1). However, lacking clarity and specifics, these policy announcements disappointed investors, and the market experienced a deep correction.
Exhibit 1: Summary of recent stimulus measures
The latest economic readings further highlighted the downside risks, reinforcing market expectations for an upgrade in stimulus policies. Based on the Chinese political schedule, we must wait until late October or early November to see concrete plans on this front from the Standing Committee meeting of the National People’s Congress. Moreover, the US elections might also bring more uncertainties, and Chinese policy makers could adjust the stimulus plan accordingly.
Investment implications
After the recent rebound, stock market valuations have returned to a level in line with the long-term average (Exhibit 2). This indicates that investors’ expectations have recovered from a remarkably cautious state to a level consistent with economic fundamentals and corporate earnings. Looking forward, the sustainability of market recovery relies on the prospects in economic growth and corporate earnings. This depends heavily on the scale and pace of subsequent fiscal policies.
Exhibit 2: China’s stock market valuations have returned to a level in line with long-term average
Forward P/E of Hang Seng Index
Source: Bloomberg, China Securities Index Co., Ltd., J.P. Morgan Asset Management. SD stands for standard deviation.
Guide to the Markets - China. Data are based on availability as of 21/10/24.
In the A-share market, “core assets” with significant competitive advantages and healthy cash flows remain attractive in valuation. A bottom-up approach focused on underlying industrial supply-demand dynamics might help to identify sectors and companies which could outperform.