Is China’s economy bottoming?

China’s economy, which has been grappling with a prolonged period of sluggish growth, may finally be turning a corner. Positive signs are emerging, mainly driven by government intervention, but the question remains: Is this uplift only temporary? If there is one factor that will greatly affect China’s economic trajectory, it is certainly the upcoming US election. As Americans head to the polls on November 5, the outcome will have significant implications for China given the delicate balance between the world’s two largest economies. A Harris presidency will essentially be an extension of the previous administration, which will likely mean a continuation of a steady, moderately upward trajectory for China’s economy in general. Conversely, a Donald Trump presidency, which seems to be in the cards, will lead to an immediate recalibration in US-China relations. Given that Trump’s previous administration was marked by tariffs and aggressive protectionist policies, many speculate a net negative impact for China. However, I see it differently based on China’s need to stay apace with the US economy. A Trump win will likely lead to an immediate economic boost in the US, and his transactional approach with other countries suggests he would engage with China to “make deals” rather than isolate it. This combination will likely prompt China to not only increase the frequency of its stimulus measures but may also prompt the creation of a mega package to spur the economy. Regardless of what may come next year, China’s economy will remain in sharp focus as analysts assess the opportunities and challenges ahead. Prevailing caution Recovery in the world’s second-largest economy has been admittedly slower than initially anticipated, bogged down by cautious domestic spending stemming from a real estate slump. Last month, French luxury conglomerate LVMH posted a 3% fall in third-quarter sales, citing slowing Chinese demand, while beauty giant L’Oréal reported a 6.5% drop in like-for-like sales in North Asia, “impacted by low consumer confidence.” Reviving the economy has proved an uphill task, with retailers waging constant battles against a shrinking consumer wallet. This challenge is further compounded by a deeply ingrained culture of financial prudence among Chinese, which discourages the use of debt – and stands in stark contrast to the Western tendency to embrace borrowing as a means of driving consumption. However, while the current situation remains challenging, some signs of positive change are afoot. Paving the way to stability Since the first quarter of this year, China started introducing softer initiatives to encourage growth. The country’s financial hub, Shanghai, launched its “Shanghai First” initiative in April, positioning the city as a global hub for product and experience launches. The program provides incentives for flagship stores and exclusive product debuts, offering financial support while streamlining event approvals and import logistics. This resulted in an uptick in “first” store openings in the city – over 114 new stores made their debut, 44.7% of which were international brands’ first stores in China. More recently, the Chinese government has started rolling out substantial fiscal stimulus packages in response to its ongoing economic challenges. This includes infrastructure development funded by $325 billion in special bonds and a debt swap program that allows local governments to refinance high-interest debt with lower-interest bonds, reducing fiscal pressure. Additionally, the government has cut interest rates, lowered banks’ reserve requirements, and injected 234.6 billion RMB ($33.29 billion) into the banking system through open market operations. The People’s Bank of China (PBOC) has also introduced schemes to inject up to 800 billion RMB ($112 billion) into the stock market through newly established monetary policy tools. Recent rounds of big-ticket IPOs on Hong Kong’s stock exchange – including Midea’s blockbuster $4 billion listing in September and Horizon Robotics’ $696 million listing last month – will likely add to the positive market outlook, shoring up foreign investor confidence in China. The property market, a key pillar of China’s economy and arguably the number one factor for follow-up consumer spending in general, is also receiving much-needed support. Measures have been introduced to alleviate burdens, including buying unused land for affordable housing and reducing mortgage rates to stimulate demand. Further government-led stimulus initiatives may continue to emerge, particularly as geopolitical developments unfold. While these measures may not be a magic bullet in solving China’s economic challenges, they offer concrete steps in the right direction that will help to restore both investor and consumer confidence over time. This latest round of stimulus from the Chinese government marks a significant shift in approach, focusing directly on consumers rather than relying on traditional trickle-down mechanisms through local governments or industries. By providing targeted support to individuals and households, the government appears to be acknowledging the need for immediate relief amid economic pressures. This move is particularly noteworthy given China’s historical reluctance to implement direct “handouts,” and highlights a willingness to explore new strategies to stimulate domestic demand. Waves of economic activity All markets go through economic cycles, but it is also important to consider the uniqueness of China as the largest socialist market economy in history. From 2011 to 2019, China experienced a transformative period with significant foreign direct investment (FDI) reaching its heights around the close of the decade. However, recent years have seen a cooling off of foreign investor interest, largely due to evolving regulatory frameworks and general concerns that doing business in China is becoming less transparent. In 2024, we started observing a shift towards a consumption-driven growth model, supported by domestic policies designed to boost spending and investment. Given the cyclical nature of China’s economy, the current downturn has likely reached its nadir. As such, history shows that foreign direct investment often increases during periods of economic transformation, and with the current market conditions in China fostering renewed economic activity, global investors are soon likely to regain confidence and seek out new opportunities. With strong market fundamentals in place, it’s not a question of if foreign investment will return, but rather when. As I often say, “Money has no memory,” and ultimately flows where opportunities lie. 2025 will likely mark a turning point for China’s economy. Each growth phase may vary in intensity, but China’s strong fundamentals, coupled with its focus on consumer-driven policies, ensure that it will remain a key player on the global stage. Angelito Perez Tan, Jr. is the founder and CEO of RTG Group Asia, advising global luxury brands on China and Greater Asia strategy for over 25 years. Based in Shanghai and Singapore, Angelito is recognized as an expert on the Chinese luxury consumer, with insights featured in prominent media titles. Named a Robb Report Thought Leader in 2022, he frequently speaks at international business conferences and holds advisory roles with several companies. All opinions expressed in the column are his own and do not reflect the official position of Jing Daily.

Is China’s economy bottoming?

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Published November 01, 2024

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Is China’s economy bottoming?