A major political shift has reawakened market interest in China. However, growing the economy and profits still requires policymakers to orient fiscal policy accordingly.
With a combination of interest rate cuts, loosening rules on home purchases and an influx of additional liquidity, China’s stock market has finally emerged from the trough. However, it is the sincerity of the country’s leaders that has given stocks an upward trend. At its usually routine September meeting, the Politburo reaffirmed China’s determination to meet its annual GDP growth target of around 5% and tackle the “weak links” in its economy – the sign more powerful to date that everything will be done to get growth back on track.
Investor optimism is based on the increasing tolerance shown by the authorities in the use of the central bank’s balance sheet, in particular by launching liquidity facilities to support the stock market. If necessary, the relatively strong position of the central government itself could be exploited to help local governments bear the burden of their bond issues. Unlike what happened after the global financial crisis, when China boosted supply by building infrastructure, it seems that in 2024, Beijing will mainly focus its attention on consumer demand.
Budget test
The markets will necessarily take into account budgetary expenditures, in the order of trillions of renminbi, but this is not yet apparent on the ground. At this stage of the cycle, China has focused on supply-side measures – lifting restrictions and lowering financing costs – to boost economic activity. Rate cuts in the United States will provide China with greater room to maneuver to ease its monetary policy. So far, however, these reductions have hardly been felt in consumer prices, which have remained generally stable.
This is why China is now supporting demand, through measures that directly replenish individual accounts. In September, China issued 300 billion renminbi ($42.5 billion) in special government bonds to finance subsidies that encourage people to trade and upgrade equipment, from household appliances to cars. Other cities could also follow Shanghai’s lead in distributing consumer vouchers to boost services.
Only one element has not (yet) changed: the role of real estate. With almost 70% of household assets stuck in housing, the price of residential property remains decisive for consumer confidence in the short term and an improvement in this regard could offset a possible “wealth effect” produced by the soaring stock market.
For individuals to feel better off, housing prices must stabilize, and above all, not rise to their historic highs. China is still keen to shed a reliance on real estate as the main driver of its growth and avoid a full-throttle reflation in the residential market. Although bold, this ambition of “controlled stabilization” – moving the economy towards a soft landing – remains certainly bold, but probably achievable.
Deep divergence
China’s small towns provide a taste of the likely future. In the eastern port city of Qingdao, there are surprisingly many people wandering the streets on an ordinary weekday. While housing prices in the city have fallen further and incomes are generally lower than in first-tier cities, such as Beijing and Shanghai, mortgages also take up a smaller share of household disposable income.
Clearly, the consumer “deterioration” narrative needs to be qualified. Chinese consumers are, it is true, spending more prudently, but increasingly, they are willing to save money to afford a small number of expensive coveted items. One clothing company took advantage of this spending spree by acquiring high-end foreign brands to complement the low-end brands in its existing portfolio. Agile businesses of this type, as well as direct beneficiaries of budgetary aid, such as breweries and household appliance manufacturers, will undoubtedly reap the benefits of a recovery in consumption.
The hope is that this consumption will then trickle down to earnings and fuel the next phase of the stock market’s recovery, which rests on a foundation of extremely low valuations. The market will only find a good rhythm if political support proves effective in the coming months and if real estate prices remain at a low level, which will in turn lead to a renewed confidence among consumers. In any case, Chinese policy has reached a milestone.
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