CHONGQING, CHINA – JANUARY 02: People visit the 2nd International Light and Shadow Art Festival at the Fine Arts Park on January 2, 2024 in Chongqing, China. The 2nd International Light and Shadow Art Festival runs from December 29 to January 7. (Photo by VCG/VCG via Getty Images)
Vcg | Visual China Group | Getty Images
BEIJING — Despite pockets of strong growth, China’s investment story has been overshadowed in the last year by longer-term problems and tensions with the U.S.
Those uncertainties remain as 2024 kicks off. The country is also navigating new territory as it starts to settle into a lower growth range following the double-digit pace of past decades.
Here’s what investors are looking at for the year ahead:
Will there be stimulus?
For all the geopolitical risks, the attraction of China as a fast-growing market has waned as the economy matures.
Many were disappointed when China’s economy did not rebound as quickly as expected after the end of Covid-19 controls in December 2022. Other than in tourism and certain sectors such as electric cars, sluggish growth was the story for much of 2023, dragged down by real estate troubles and a slump in exports.
Several international investment banks changed their growth forecasts for China multiple times last year. After all the back and forth, the economy is widely expected to have grown by around 5%.
“Policy response is essential to solidify the recovery momentum,” Citi analysts said in a Jan. 3 report.
They expect that as early as January, the People’s Bank of China could reduce rates, such as the reserve requirement ratio — the amount of funds lenders need to hold as reserves. They also project that overall GDP could grow 4.6% this year.
Beijing has announced a slew of incrementally supportive policies. But it’s taken time to see a clear impact.
For the people who are already [invested] in China, and they kind of stuck with it for 2023, it’s this belief that the catalyst is coming.
Jason Hsu
CIO, Rayliant Global Advisors
“We believe property stabilization, a clear exit from deflation, better policy execution and communication would all be necessary for confidence recovery, with stimulus indispensable and good reforms welcome,” the Citi analysts said. “The risk is that markets may not be patient enough with reforms.”
In mid-December, top Chinese authorities held an annual meeting for discussing economic policy for the year ahead. An official readout did not indicate significant stimulus plans, but listed technological innovation as the first area of work.
Among major upcoming government meetings, Beijing is set to release detailed economic targets during a parliamentary gathering in early March.
“For the people who are already [invested] in China, and they kind of stuck with it for 2023, it’s this belief that the catalyst is coming,” Jason Hsu, chairman and chief investment officer of Rayliant Global Advisors, said in late November.
“They’re not really focused on the fundamentals of companies of the markets,” he said. “They’re just betting on purely monetary and fiscal policy to buoy up the economy and the stock market.”
However, it remains to be seen whether China will boost growth in the same way it did previously.
“My framework is China is not going to put up significant stimulus,” Liqian Ren, leader of quantitative investment at WisdomTree, said in late November.
“Even if China has a meeting, even if they come up with a good package, I think a lot of these stimulus are constrained by this framework of trying to upgrade China’s growth,” she said, referring to Beijing’s efforts to promote “high-quality,” rather than debt-driven, growth.
What will happen to real estate?
Real estate is a clear example of a debt-fueled sector, one that has accounted for about a quarter of China’s economy.
The property market slumped after Beijing cracked down on developers’ high reliance on debt for growth in 2020. The industry’s close ties to local government finances, the construction supply chain and household mortgages have raised concerns about spillover to the broader economy.
The pace of decline in demand has slowed and we expect to see somewhat more stability in 2024.
“China’s property downturn has been the biggest drag on its economy since the exit from zero-Covid restrictions in late 2022,” Goldman Sachs analysts said in a Jan. 2 report. “Property sales and construction starts plunged in 2021-22 and continued to decline on net in 2023.”
“However, the pace of decline in demand has slowed and we expect to see somewhat more stability in 2024,” the analysts said.
Commercial housing sales for 2023 as of November fell by 5.2% from a year ago, according to National Bureau of Statistics data accessed via Wind Information. That’s after those sales plunged by 26.7% in 2022.
Although the real estate situation is “gradually stabilizing, it’s hard to see a turning point,” said Ding Wenjie, investment strategist for global capital investment at China Asset Management Co., according to a CNBC translation of her Mandarin language remarks.
She expects policy support will increase in 2024, because authorities have shifted from focusing on preventing risks to pursuing progress, while maintaining stability. Ding was referring to new official language that appeared in the readout of December’s high-level government meeting.
Where are the opportunities?
While it’s clear Beijing would like to reduce the property sector’s contribution to China’s GDP, it’s less certain whether new growth drivers can fill the void.
Machinery, electronics, transport equipment and batteries combined contributed to 17.2% of China’s economy in 2020, Citi analysts said.
That means such areas of manufacturing could offset the drag from real estate, the analysts said. But they pointed out the economic transition can’t happen overnight since it requires addressing a mismatch in labor market skills and adjusting a supply chain that’s been built to support property development.
“Were tech sanctions to become a binding constraint for the new drivers, their potential to make up for the shortfall from property would not materialize,” the report said.
Despite the macro challenges, Beijing has signaled it wants to bolster domestic tech and advanced manufacturing.
Ding from China AMC said sub-sectors of high-end manufacturing could benefit this year due to an upturn in the global tech cycle. Examples include those related to consumer electronics and computers.
She also expects producer prices to return to growth at the end of the second quarter, boosting corporate earnings per share by about 8% to 10% in China. Another area her team is looking at is Chinese companies that are growing their global revenue.
