Recently, policymakers have introduced numerous fiscal and monetary measures to promote domestic consumption and enhance liquidity.
At the July Politburo meeting, China’s highest decision-making authority outlined six policies to boost the economy:
- stepping up counter-cyclical macro measures
- easing restrictions in the fragile property market to encourage homebuyers
- addressing local government debt
- stimulating consumption in specific areas, such as consumer electronics and electric vehicles
In an extremely rare move, China also recently lifted its 2023 budget deficit from 3% of GDP to 3.8% to account for a rise in central government debt. Meanwhile, it approved a 1 trillion yuan (US$137 billion) sovereign bond issuance to help rebuild and improve urban infrastructure.
Is it enough?
We have always said the recovery would be gradual. Macroeconomic indicators are giving some encouraging signals that the targeted policy support may be starting to bear fruit. China’s third-quarter GDP recently beat market expectations. Factory activity in the manufacturing sector has broadly been on an upward trend since June.
On the consumption side, spending per person has plenty of room to grow. However, consumer-facing categories such as restaurant services, auto sales and online goods purchases have shown encouraging signs of recovery.
Capital expenditure recovery?
Furthermore, we expect the industry restocking cycle to turn positive in the fourth quarter. There’s been a high correlation between enterprise capex and the inventory cycle. The latter indicates supply-demand balance and shapes business expectations. In China, this typically spans around three to four years.
When China reopened, the economy was on the hillside of a destocking cycle, i.e., at the beginning of the inventory drawdown process. As a result, businesses failed to see a swift recovery due to excess supply versus a slow pace of demand recovery. This dynamic pushed down prices and forced companies to further cut capacity. We expect the demand-supply dynamic to continue to improve and eventually turn into a broad-spectrum capex cycle.
Starting to spend
In our view, a domestic demand recovery will depend on consumer confidence. This is shaped by two important factors:
- income and employment expectations, both of which are likely to improve once companies start expanding capacity
- stabilisation of the property market – a major source of Chinese consumer wealth.
To help, policymakers have introduced several supply- and demand-side policies to support the real estate sector, including easing buying restrictions in most Tier 1 cities. That said, the weakness in the housing market has persisted. We therefore expect more easing measures in the coming months.
What else is needed?
We anticipate additional policy support in various sectors. These include initiatives to boost private consumption spending, particularly for significant purchases like housing. We also expect further measures to stabilise the real estate market, such as adjusting mortgage rates, enhancing housing standards, providing extra subsidies for homebuyers, easing purchase restrictions, and more.
On top of this, policymakers will continue to tackle issues around local government debt and aim to rebuild corporate confidence, especially within the private sector. Finally, enhancing capital markets and restoring investor confidence will remain overarching goals.
We’ll keep an eye on the Central Economic Work Conference in mid-December for further policymaking indications from the central government.
When do we expect the markets to turn?
We believe the market will rerate when more macro indicators consistently show signs of improvement. As it stands, and despite resilient earnings and strong fundamentals, many robust business franchises in China are currently trading at significantly low valuations.