Dr Shane Oliver | AMP
After a run of disappointing economic data, collapsing property prices and Chinese shares falling to their lowest since 2019 giving rise to increasing concerns about the outlook, China appears to be moving towards aggressive policy stimulus. But what’s driving the change? Will it work? And what does it mean for investors and Australia?
The pivot towards aggressive stimulus looks to have been driven by increasing concern about China’s economic outlook. Chinese growth bounced after its Covid restrictions were eased late in 2022. But the bounce was short-lived, and growth has remained weak by Chinese standards ever since slowing to around 4.5% year-over-year - with poor growth in retail sales, investment and imports and annual credit growth falling to a record low.
China Activity Indicators (Source: Bloomberg, AMP)
The softness has been confirmed by ongoing weakness in business conditions PMIs, and with spare capacity arising, it's reflected in very low consumer price inflation and deflation in producer prices. The slowdown reflects a combination of factors, but key drivers have been:
Chinese residential property prices (Source: Bloomberg, AMP)
Cyclical problems have been exacerbated by structural problems, notably:
Source: BIS, AMP
Reversing the demographic decline will be an uphill battle - as many other countries have found. Addressing the other structural problems and cyclical issues requires aggressive monetary and fiscal stimulus and reforms to clear the property overhang, rebalance the economy towards consumer spending (via pension, health and education spending and reforms) to lower precautionary household saving and boost productivity growth and fiscal reform to make local government finances more sustainable.
Over the last year or so, China has been providing just enough support to the economy to avert a major crisis. It looked like the Government was: more focussed on trying to avoid reflating credit and housing bubbles (like Japan in the early 1990s); wanted to avoid “decadent” consumer stimulus as seen in various Western countries; or was not aware of the problem.
But with the economy and property market continuing to slide there was increasing concern that China would not meet its 5% growth target for this year and worse still might slide into a decades-long period of slow growth and deflation like Japan did after its 1980s boom years as it fails to address its structural problems.
A run of soft economic data last month appears to have galvanised the government into action, so, starting in late September there has been a steady flow of stimulus announcements:
To address this requires fiscal stimulus. So far, the announcements have been in the right direction but lack detail regarding size and help for consumers. We are now waiting for the National People’s Congress Standing Committee late this month to confirm the size of the fiscal stimulus. Most expectations are for around 2 trillion Renminbi ($420 billion) in stimulus or 1.6% of GDP.
Based on what we have heard, something of this order is likely and it could boost growth in 2025 to maybe 5.5% and at least stabilise property prices.
However, we are less confident that it will address China’s structural problems – saving is likely to remain too high and consumer spending too low; the trend towards increasing state intervention is likely to remain; the revenue/spending mismatch of local governments will remain; and it will be very hard to reverse the deteriorating demographics. So, a longer-term trend towards slower growth in China will likely remain in place.
While Chinese shares are 22% above their low in mid-September, on the back of policy stimulus they are still relatively cheap, suggesting room for more upside if significant stimulus is confirmed by the NPC.
Source: Reuters, AMP
Despite a slump in Australian goods exports going to China in 2021 (from around 42% of the total to 30%) and weak Chinese nominal growth, the Australian economy has been relatively resilient compared to its past correlation to China reflecting a combination of solid bulk commodity prices; strong population growth; and a muted mining investment cycle. So 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.
And it will likely help keep the iron ore price tracking above the Federal Government’s budget assumptions albeit the boost to the budget (via stronger mining profits) won’t be as strong as it has been over the last two financial years.
For investors, the move by China towards more aggressive policy stimulus should help the global economy avoid recession and along with central banks lowering interest rates is positive for shares on a 6-12 month horizon.
It may not be enough to reverse the Australian share market’s relative underperformance, but it may help reduce it.
Chinese stimulus is positive for the Australian Dollar but the main positive here remains an improving Australian/US interest rate gap, as the RBA lags the Fed in cutting interest rates.
All prices and analysis at 16 October 2024. This document was originally published in Livewire on 16 October 2024. This information has been provided by AWM Services Pty Ltd (ABN 15 139 353 496)(AFSL No. 366121), part of the AMP Group. The content is distributed by WealthHub Securities Limited (WSL) (ABN 83 089 718 249)(AFSL No. 230704). WSL is a Market Participant under the ASIC Market Integrity Rules and a wholly owned subsidiary of National Australia Bank Limited (ABN 12 004 044 937)(AFSL No. 230686) (NAB). NAB doesn’t guarantee its subsidiaries’ obligations or performance, or the products or services its subsidiaries offer. This material is intended to provide general advice only. It has been prepared without having regard to or taking into account any particular investor’s objectives, financial situation and/or needs. All investors should therefore consider the appropriateness of the advice, in light of their own objectives, financial situation and/or needs, before acting on the advice. Past performance is not a reliable indicator of future performance. Any comments, suggestions or views presented do not reflect the views of WSL and/or NAB. Subject to any terms implied by law and which cannot be excluded, neither WSL nor NAB shall be liable for any errors, omissions, defects or misrepresentations in the information or general advice including any third party sourced data (including by reasons of negligence, negligent misstatement or otherwise) or for any loss or damage (whether direct or indirect) suffered by persons who use or rely on the general advice or information. If any law prohibits the exclusion of such liability, WSL and NAB limit its liability to the re-supply of the information, provided that such limitation is permitted by law and is fair and reasonable. For more information, please click here.