Although China’s latest efforts to boost growth through a series of fiscal policy announcements are likely to support a slight cyclical recovery, it is unclear whether they can reverse long-term structural problems, according to an economist.
In a market note released on Wednesday, AMP chief economist Shane Oliver said China’s economic slowdown began in 2023, driven mainly by property issues which have added to uncertainty for households and worsened fears about relatively high unemployment.
“As a result of all this, estimates of its potential real GDP growth have fallen from around 10 percent in 2006-2010 to around 5 percent today and around 3 percent in the next decade,” he said. Oliver said.
Although reversing population decline will be “an uphill battle,” Oliver said addressing other structural problems and cyclical issues requires “stimulus measures and aggressive monetary and fiscal reforms.”
Over the past year, he noted, China has provided support in dribs and drabs to avert a major crisis, but a series of poor economic data last month appears to have “galvanized” the government toward more concrete actions.
Starting in late September, the People’s Bank of China announced a long list of measures to ease monetary policy, while the Politburo pledged to strengthen countercyclical policies, achieve “necessary” levels of fiscal spending and to put an end to the decline of real estate. Even though the Finance Ministry confirmed last weekend a further move towards a much larger fiscal stimulus package, the announcements made so far lack detail.
Investors are now waiting for the Standing Committee of the National People’s Congress to confirm the scale of fiscal stimulus measures at the end of October.
“Most expectations are for around 2 trillion renminbi (A$420 billion) in stimulus, or 1.6% of GDP. From what we have heard, something of this order is likely and it could boost growth in 2025 to perhaps 5.5 percent and at least stabilize house prices,” Oliver said. .
But Oliver stressed that it remains to be seen whether these measures will serve to address China’s more structural concerns. He predicted that “a long-term trend toward slower growth” would remain in place.
However, according to the chief economist, the cyclical recovery brought about by stimulus measures is still expected 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 resource shares,” he said.
“And it will likely help keep the price of iron ore above the federal government’s budget assumptions, even though the budget will be boosted. [via stronger mining profits] will not be as strong as in the last two years.
Global funds are ‘reluctantly optimistic’ on China
On stocks, Oliver noted that although Chinese stocks are 22 percent above their mid-September low, there is room for further upside if significant stimulus measures are confirmed by the NPC.
This sentiment is reflected in recent Bank of America (BofA) research, which reveals that growth expectations for China have started to improve.
Indeed, BofA’s latest Asia Fund Manager Survey (FMS), conducted among 231 panelists between October 4 and 10, describes global investors as being “grudgingly optimistic” about China’s recent announcements.
Considered a turning point, these announcements prompted players to abandon their search for opportunities elsewhere and turn to China.
“China’s stimulus announcement has led investors to raise their Chinese growth outlook to 48% net, on expectations of a stronger economy – the most optimistic level since April 2023,” said the BofA.
When asked about the biggest “winner” from anticipated stimulus, respondents cited emerging market stocks (47%) and commodities (41%). Expected “losers” included government bonds (41 percent) and Japanese stocks (33 percent).
