Economics Update October 2024 - Price fireworks despite the crisis: China's economy likely to see only a temporary growth spurt

The interest rate cuts decided by the Chinese central bank and the measures announced by the Politburo of the Communist Party to support the economy have triggered a price explosion on the Chinese stock market since the last week of September. However, it is not yet clear that this stimulus will actually lead to a sustained upturn in the Chinese economy. The challenges currently facing the Chinese leadership are too complex for that. 

China's economy in the liquidity trap

The government's decision to reduce the excesses that have arisen in the real estate sector over a long period of time has resulted in real estate prices falling for around two years. This has led the Chinese economy into a liquidity trap: falling interest rates are not leading to a revival in investment activity because the players are expecting prices to continue to fall in view of the high oversupply of housing. Contrary to what was intended, this has triggered a chain reaction with serious consequences for the economy as a whole: Due to the loss of assets resulting from falling real estate prices, private consumption is also massively impaired, which in turn considerably slows down overall economic momentum. The attempt to counteract this by increasing exports is only successful to a limited extent because the global economy as a whole is weakening and both the US government and, more recently, the EU Commission are taking measures against the flooding of their markets with cheap Chinese products.

Restructuring the real estate market needs more time 

The steps taken so far to stabilize the economy have only been successful for a short time. For example, the central bank made 500 billion yuan available for the purchase of vacant apartments by local state-owned companies, of which only 25 billion has been used so far, as the business is apparently unattractive for the companies. There is also resistance from homeowners who fear lower market prices in the long term and an unfavorable change in the social structure of their neighborhoods if a large proportion of the houses are rented out as social housing. A major central bank programme, as was last the case in 2015, would be necessary to stabilize property prices in the long term. The current measures fall well short of this and are primarily aimed at achieving the GDP growth target of 5% and preventing the economy from slipping further. However, this target is likely to be achieved, especially as the leadership has promised to expand the measures if necessary. However, it is unlikely that growth momentum will be significantly higher in the long term: there are no signs that the Chinese leadership under Xi Jinping has fundamentally changed its priorities, and these priorities do not lie in high growth momentum, but in the most comprehensive control possible and the pursuit of specific goals to strengthen (global) political ambitions.

The lack of reaction of the oil price to the new support measures was revealing: If China's economy were to actually move onto a higher growth path, experience has shown that this would have caused the oil price to rise significantly, as China remains one of the largest consumers of oil. In view of the dramatically low valuation of Chinese equities to date, there is a tactical opportunity for professional investors. However, the strategic outlook remains subdued.