CHONGQING, CHINA – JANUARY 2: People attend the 2nd International Light and Shadow Art Festival at Fine Arts Park in Chongqing, China on January 2, 2024. The 2nd International Light and Shadow Art Festival will take place from December 29th to January 7th. (Photo by VCG/VCG via Getty Images)
Vcg | Visual China Group | Getty Images
BEIJING – Despite periods of strong growth, China's investment story last year was overshadowed by longer-term problems and tensions with the United States
These uncertainties remain at the beginning of 2024. The country is also entering uncharted territory as it begins to settle into a lower growth range after the double-digit growth of the past few decades.
This is what investors expect for the coming year:
Will there be incentives?
Despite all the geopolitical risks, China's attractiveness as a fast-growing market has waned as the economy matures.
Many were disappointed when China's economy did not recover as quickly as expected following the end of Covid-19 controls in December 2022. Apart from tourism and certain sectors such as electric cars, growth was sluggish for much of 2023, hurt by real estate problems and a collapse in exports.
Several international investment banks have changed their growth forecasts for China several times in the past year. After all the back and forth, the general consensus is that the economy grew by around 5%.
“A policy response is critical to solidify recovery momentum,” Citi analysts said in a Jan. 3 report.
They expect the People's Bank of China could cut interest rates, such as the reserve ratio – the amount lenders are required to hold in reserves – as early as January. They also forecast that overall GDP could grow by 4.6% this year.
Beijing has announced a series of gradual supportive measures. However, it took some time for significant effects to become apparent.
For the people who already are [invested] In China, and they're kind of holding on to this until 2023, it's the belief that the catalyst is coming.
Jason Hsu
CIO, Rayliant Global Advisors
“We believe that housing stabilization, a clear exit from deflation, better policy implementation and communication would be necessary for restoring confidence, with economic stimulus essential and good reforms welcome,” Citi analysts said. “The risk is that markets are not patient enough with reforms.”
In mid-December, top Chinese authorities held an annual meeting to discuss economic policy for the coming year. An official announcement did not indicate any significant economic stimulus plans, but named technological innovations as the first area of work.
Among the most important upcoming government meetings is that Beijing will release detailed economic targets at a parliamentary meeting in early March.
“For the people who already are [invested] in China, and they've kind of stuck with it through 2023, it's the belief that the catalyst is coming,” Jason Hsu, chairman and chief investment officer of Rayliant Global Advisors, said in late November.
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“They don’t really focus on the fundamentals of companies in the markets,” he said. “They only rely on pure monetary and fiscal policy to stimulate the economy and the stock market.”
However, it remains to be seen whether China will boost growth in the same way as before.
“My framework is that China will not provide significant stimulus,” Liqian Ren, head of quantitative investing 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 those incentives will be constrained by this framework of trying to boost China's growth,” she said, referring to Beijing's efforts to ” “To promote high-performance packages”. “Quality” and not debt-driven growth.
What happens to real estate?
Real estate is a clear example of a debt-driven sector, accounting for about a quarter of China's economy.
The property market slumped after Beijing cracked down on developers' heavy reliance on debt for growth in 2020. The industry's close ties to local government finances, the construction supply chain and residential mortgages have raised concerns about spillovers into the wider economy.
The pace of demand decline has slowed and we expect a little more stability in 2024.
“China’s real estate downturn has been the biggest drag on its economy since zero-Covid restrictions ended in late 2022,” Goldman Sachs analysts said in a Jan. 2 report. “Real estate sales and housing starts fell sharply in 2021 and 2022 and continued to decline on balance in 2023.”
“However, the pace of demand decline has slowed and we expect some more stability in 2024,” the analysts said.
Commercial real estate sales for 2023 fell 5.2% in November compared to a year ago, according to National Bureau of Statistics data accessed through Wind Information. This comes after those sales plunged 26.7% in 2022.
Although the real estate situation is “gradually stabilizing, it is difficult to see a turning point,” Ding Wenjie, global capital investment strategist at China Asset Management Co., said in Mandarin, according to a CNBC translation of her remarks.
It expects political support to increase in 2024 as authorities have shifted their focus from avoiding risks to pursuing progress while maintaining stability. Ding was referring to the new official language that appeared in the reading at the high-level government meeting in December.
Where are the possibilities?
While it is clear that Beijing wants to reduce the real estate sector's contribution to China's GDP, it is less certain whether new growth drivers can fill the gap.
Machinery, electronics, transportation equipment and batteries together contributed 17.2% to China's economy in 2020, according to Citi analysts.
That means such manufacturing areas could offset the drag on real estate, the analysts said. However, they noted that economic transformation cannot happen overnight as it requires addressing a skills mismatch in the labor market and adapting a supply chain built to support real estate development.
“If tech sanctions were to become a binding constraint on the new drivers, their potential to compensate for the lack of ownership would not be realized,” the report says.
Despite the macroeconomic challenges, Beijing has signaled it wants to strengthen domestic technology and advanced manufacturing.
China AMC's Ding said high-end manufacturing subsectors could benefit this year due to an upturn in the global technology cycle. Examples include those related to consumer electronics and computers.
It also expects producer prices to rise again at the end of the second quarter, boosting corporate earnings per share in China by about 8% to 10%. Another area her team is studying is Chinese companies increasing their global sales.