Bumpy road ahead for China?

13 November 2023

Please note: All data referenced in this article is sourced from Bloomberg unless otherwise stated, and is accurate at the time of publishing. 

China’s stuttering post-pandemic recovery is becoming something of a global concern. Its high-achieving economy has long churned out growth figures well above those of western countries, but in 2023 it’s on track to post growth of just 4.5% – modest, even by China’s usual lofty standards.

And while this is better than the 3.0% expansion of 2022, economists were expecting more this year, especially after China had ended its draconian zero-COVID restrictions around 12 months ago. So where does this leave investors heading into 2024?

Challenges aplenty

China’s economy faces challenges on three fronts. First, slow growth in the developed world, and trade tensions with some of its major markets, are weighing on manufacturing. Second, the domestic real estate sector is still reeling from its recent troubles. And third, Chinese consumers are focused on reducing debt rather than spending – contributing to a “balance sheet recession”.

The government’s limited stimulus measures have also done little, so far, to boost growth – only a much larger fiscal injection would significantly increase economic activity. That said, every little helps, and the country’s weak economic momentum does appear to be bottoming out. 

Outlook hazy but not hopeless

With no major fiscal stimulus planned and deleveraging continuing at pace to reduce the national debt, China’s economic prospects are hazy. As a result, the country’s economic growth is likely to remain subdued in 2024, at around 4%.

This pessimism seems hard to break. But simply because expectations are so low, China could still surprise investors in 2024. Even modest economic improvements could have a positive impact. For instance, more supportive policies, the slowing down of deleveraging, or a global economy that recovers quicker than expected – all of which could kickstart China into gear, and drive growth that exceeds expectations.

Muted Chinese inflation 

While most developed countries have been battling inflation in 2023, China has managed to keep domestic prices low, even experiencing a brief bout of deflation in July.  

Food and housing costs, two key components of China’s consumer price index (CPI), have been subdued for much of 2023, but are now showing signs of rising. It suggests inflation could pick up, however wage pressures still remain muted due to slack in the labour market.

Headline CPI could rise to around 1.6% in 2024, due in part to base effects from this year's low inflation data. Additionally, the Chinese government has a history of using fiscal and monetary stimulus to boost the economy, and there is no reason to believe they will not do so again.

Fresh opportunities ahead?

China's economy is expected to have a less-than-smooth recovery, and it’s hard to say what will happen next. Geopolitical tensions are also unpredictable and can flare up quickly, as we’ve seen in the Middle East and Eastern Europe. And relations between China and the US have a long way to go before they can be considered as having healed. 

However, on a more positive note, a lack of inflationary pressures should allow China's central bank to keep monetary policy loose in 2024. Also, Chinese leaders are still focused on their long-term goal of “Common Prosperity”. This means raising incomes for low-wage workers, making things fairer for everyone, and developing all regions of China more evenly.

For investors, it gives hope for the future, albeit nothing is ever guaranteed. And it shows that China may well already have most of the conditions in place to overcome its growth challenges and rebalance the economy, which, in turn, should open-up new investment opportunities.

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