The Chinese government needs to do more to support its domestic economy in the upcoming year, investors said during a panel discussion at the 5th China Fixed Income Summit held last week in Hong Kong.
Ecaterina Bigos, chief investment officer (CIO), core investments Asia ex-Japan, AXA Investment Managers, said that the two greatest challenges for the world’s second-largest economy come from a weak domestic economy and crises in the property market.
“The revenge consumption people had imagined post-pandemic did not materialise in China due to a lack of fiscal support during lockdowns,” she said. “The subdued trend is further manifested in the property market.”
Unlike the US and many European countries, which had accumulated great liquidity in household saving pools and saw tight labour markets during the pandemic, Bigos argued that China was left with weak consumption and a high unemployment rate.
Dongchen Wang, director and fixed income portfolio manager at Ping An Asset Management (Hong Kong), believes that if properly stimulated, revived domestic consumption could be the strongest growth pillar in 2024.
“Although we have not seen much policy support dedicated to disposable income, unemployment or retail spending, more monetary and fiscal support would help restore confidence and sustain the economic growth,” Wang said.
Bigos believed that support for the private sector is likely to be conducted through indirect channelling rather than “helicopter money”, and that the property market still holds a crucial role as it is where 60% of China’s household investment is deployed.
Structural shift
In late October, China issued Rmb1 trillion ($137 billion) of sovereign debt aiming to help reconstruction in areas hit hard by natural disasters. The proceeds will be distributed to local governments to support infrastructure in two batches this year and in 2024, according to the Ministry of Finance.
The issuance has sent China’s budget deficit ratio to 3.8% from 3% previously. Risks are “manageable in general”, according to an economist cited by the Xinhua news agency.
The move was seen as a major step that Beijing has taken to boost economic growth, however it remains unknown whether infrastructure will still be a strong stimulus for the wider economy.
From a ratings perspective, Jeremy Zook, director of Asia Pacific sovereign ratings at Fitch Ratings, said that while such fiscal incentives could send positive signals to the market, they could bring further pressure to central and local government debt piles. During the pandemic China’s debt/GDP ratio has risen by about 16 percentage points, even without fiscal policies.
Bigos suggested that the direction of existing policies should be aimed at moving the economy to a more balanced model -- one which focusses more on consumption and high-end manufacturing instead of infrastructure reinvestment.
“It's certain that China needs to go through this cyclical adjustment, but we do think the government needs to do a lot more targeted and forceful measures to help the economy recover,” she said.
2024 outlook
Looking ahead to next year, credit pressure might ease as both the US Federal Reserve and the European Central Bank (ECB) are expected to lower interest rates in the second half of 2024, the panellists said. And with China taking the lead in electrical vehicle manufacturing and exports, in addition to renewable energy sources, new growth opportunities would continue to help the economy.
However, the government’s focus would still be on restoring confidence in the property sector, Zook predicted.
He noted that instead of offering economic boosts, current policies are focusing more on an “engineered slowdown” in the property market through managing tail risks and keeping a floor for possible fallouts. However, it remains uncertain whether these measures will be sufficient to revive household confidence and demand.
The panel was moderared by FA's strategy and content director Andrew Crooke. For more FA analysis on China’s debt problems click here and for more coverage from the summit see here.
