Monday, 21 October 2024 Reading time : 4 minutes

China is stuck in a stubborn economic downturn that has spread to large parts of the economy. At the heart of the problems is the property sector, which has traditionally been a key driver of Chinese growth: the International Monetary Fund (IMF) estimates that in recent decades it has contributed up to 20% of economic output to the world's second-largest economy. Encouraging the sector has long been a pillar of the government's growth strategy under President and party leader Xi Jinping, but as overheating became more pronounced, Beijing cracked down on highly indebted property developers in 2020. 

As a result, property prices began to fall, and construction activity collapsed. The outbreak of the corona pandemic was another blow to the Chinese economy, exacerbated by the government's strict zero-Covid policy. Hopes of a recovery once the pandemic was over have been dashed, and the economy is now in a broad-based slowdown.

Wary consumers
The extent to which the Chinese have lost confidence in the economy is reflected in consumer sentiment. It is currently almost as low as it was in November 2022, when it hit an all-time low. Uncertainty is high after years of a property crisis that has wiped out around USD 18 trillion in household wealth, according to Bloomberg. As a result, people prefer to build up a financial safety cushion rather than spend their money. The resulting downward pressure on price growth has led to the longest period of deflation since 1999. The industrial picture is also bleak: with two exceptions, the Purchasing Managers' Index (PMI) for the manufacturing sector has registered below 50 over the past twelve months, signalling a contraction in industrial activity. 

One of the few bright spots so far has been the export sector, with goods exports recently reaching their highest level in almost two years. But even this segment is facing headwinds. In particular, the United States accuses Beijing of unfair competition and price dumping, which has led the US government to impose import and punitive tariffs on Chinese goods in the past.

Stocks rally after stimulus package 
The Chinese government has not been idle in the face of its economic woes. Over the past few years, it has repeatedly tried to stabilise the housing market, thereby stimulating the overall economy. But the spark has failed to catch fire. After unexpectedly weak growth figures for the second quarter, a growing number of economists doubted that Beijing would be able to meet the 5% growth target set for 2024, according to a Bloomberg survey.

In late September, the Chinese government finally stepped up its efforts, adopting a series of monetary policy measures designed to finally bring about the hoped-for economic turnaround. The People's Bank of China cut key interest rates and eased monetary policy as aggressively as during the coronavirus crisis. In addition, interest rates on existing mortgage loans were cut and measures were taken to encourage bank lending. 

Financial markets responded to the announcement with a historic rally: the MSCI China index rose by more than 30% in just a few days. Shares in luxury goods companies, which generate a significant proportion of their sales in China, also rose, with the Stoxx Europe Luxury 10 index gaining almost 13%. However, the rally quickly ran out of steam.

Vague details on fiscal measures
The initial enthusiasm for the stimulus package has since faded and Chinese equites have given back some of their recent gains. In particular, the lack of information on a possible fiscal package is causing disappointment in financial markets. According to Reuters, until recently market analysts were speculating about fiscal support measures of up to CNY 10 trillion (USD 1.4 trillion), including subsidies, consumer vouchers and financial support for families with children. 

But Beijing has so far remained vague. At a press conference in mid-October, Chinese Finance Minister Lan Fo'an reiterated efforts to put the economy back on a growth path, but did not provide any concrete figures on a possible rescue package. According to Reuters, the statement on financial stimulus plans was big on intent but lacked any measurable details. 

However, the cautious tone does not mean that the Chinese government has exhausted its room for manoeuvre. Financial markets are now focusing on the next meeting of the Standing Committee of the National People's Congress. A year ago, the Chinese government used this platform to announce a budget revision. 

There is still skepticism in the financial markets about whether the Chinese government will take the necessary decisive action to tackle the economic downturn – this market environment could create investment opportunities.

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