While China’s latest efforts to stimulate growth through a series of fiscal policy announcements are likely to support a mild cyclical upswing, it’s unclear if they can reverse long-term structural problems, according to an economist.
In a market note on Wednesday, AMP’s chief economist, Shane Oliver, said China’s economic slowdown began back in 2023, driven mostly by its property troubles which worsened the uncertainty for households and compounded fears regarding relatively high unemployment.
But these cyclical problems have also been exacerbated by structural issues, Oliver said, including excessive savings, problems in export-related investment, problems in property-related investment, poor demographics, as well as fiscal imbalances between the central and local governments.
“As a result of all this, estimates of its potential real GDP growth have fallen from around 10 per cent in 2006–10 to around 5 per cent now and around 3 per cent next decade,” Oliver said.
While reversing the demographic decline will be “an uphill battle”, Oliver said addressing the other structural problems and cyclical issues requires “aggressive monetary and fiscal stimulus and reforms”.
Over the last year, he noted, China has been drip-feeding support to avert a major crisis, but a run of soft economic data last month appears to have “galvanised” the government into more concrete action.
Starting in late September, the People’s Bank of China announced a long list of measures to ease monetary policy, while the Politburo committed to increased counter-cyclical policies, “necessary” levels of fiscal spending and measures to halt the property decline. While a subsequent move towards a much bigger fiscal stimulus was confirmed last weekend by the Ministry of Finance, the announcements to date have lacked detail.
Investors are now waiting for the National People’s Congress Standing Committee to confirm the size of the fiscal stimulus in late October.
“Most expectations are for around 2 trillion renminbi (AU$420 billion) in stimulus or 1.6 per cent of GDP. Based on what we have heard, something of this order is likely and it could boost growth in 2025 to maybe 5.5 per cent and at least stabilise property prices,” Oliver said.
But Oliver stressed that whether these measures serve to address China’s more structural concerns remain to be seen. He predicted “a longer-term trend towards slower growth” to remain in place.
However, according to the chief economist, the stimulus-driven cyclical boost is still likely to be positive for Australia.
“A stimulus-driven cyclical rebound in Chinese growth may not provide as big a boost to the Australian economy as it might have in the past. But it will still help support export demand, commodity prices and resources shares,” he said.
“And it will likely help keep the iron ore price tracking above federal government’s budget assumptions albeit the boost to the budget [via stronger mining profits] won’t be as strong as it has been over the last two financial years.”
Global fundies ‘reluctantly bullish’ on China
On shares, Oliver noted that while Chinese shares are 22 per cent above their low in mid-September, there is room for more upside if significant stimulus is confirmed by the NPC.
This sentiment is reflected in the recent Bank of America (BofA) research, which revealed that growth expectations for China have begun to look up.
Namely, BofA’s latest Asia Fund Manager Survey (FMS), which surveyed 231 panellists between 4 and 10 October, described global investors as “reluctantly bullish” on China’s recent announcements.
Seen as a pivot, these announcements have spurred participants into abandoning their search for opportunities elsewhere and turn back towards China.
“China’s stimulus announcement caused investors to raise their outlook on Chinese growth to a net 48 per cent expecting a stronger economy – the most optimistic level since April 2023,” BofA said.
When asked about the greatest “winner” from anticipated stimulus, respondents pointed to emerging market equities (47 per cent) and commodities (41 per cent). Expected “losers” included government bonds (41 per cent) and Japanese equities (33 per cent).
