The 2024 growth target of “around 5%” remains on a knife edge despite past policy easing gaining traction, and that activity could be stabilising in sequential terms. 

Our Chinese Financial Conditions Index (CFCI) has eased for the third consecutive month. The CFCI could be pushed higher by government debt issuance helping the credit impulse to turn and continued declines in long-dated yields, which are confounding the PBOC’s attempts to stem the bond market rally. 

Speculation is rife that banks will lower interest rates on existing mortgages, providing a welcome boost to household disposable income. That said, with house prices continuing to fall at a fast pace, a negative wealth effect is likely to keep consumer confidence depressed.

China’s August data releases generally reinforced the lacklustre economic picture that emerged over the summer: many headline activity measures slowed and fell short of consensus expectations. Our China Activity Indicator has however firmed over the past two months. 

Questions remain as to whether China is sleepwalking into ‘low-flation’ or even ‘Japanification’. Headline CPI inflation is positive, but tepid. We now judge that the continuation of an incremental and supply-side biased policy mix will limit annual CPI inflation to just 1% in 2025.

The spectre of another trade war is a key factor keeping the policy floodgates shut for now. A forceful stimulus package that could counter much, but not all, of the damage should be unleashed if push comes to shove. 

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