The Chinese economy is waiting for stimulus measures. Here are the country’s plans

BEIJING – With promised government support yet to materialize, China’s economy has not yet seen the turnaround investors have been waiting for.

Although policymakers have cut interest rates and announced broad stimulus plans since late September, details of the long-awaited budget support are unlikely to come until the annual parliamentary meeting in March. The official GDP figures for 2024 will be released on Friday.

“China’s fiscal stimulus is not yet sufficient to address constraints on economic growth… We are cautious over the longer term given China’s structural challenges,” BlackRock Investment Institute said in a weekly report on Tuesday. The company, which has a modest overweight in Chinese stocks, indicated it was willing to buy more if conditions changed.

In the meantime, the decline in domestic demand and concerns about deflation are becoming increasingly urgent. Consumer prices will have barely increased in 2024, by only 0.5% if volatile food and energy prices are excluded. That’s the slowest increase in at least a decade, according to data available in the Wind Information database.

“Consumer spending remains weak, foreign investment is declining and some industries are facing growth pressures,” Beijing Mayor Yin Yong said in an official annual report on Tuesday.

The capital aims for consumer price inflation of 2% in 2025 and wants to stimulate technological development. Although national economic targets won’t be announced until March, senior economic and financial officials have told reporters in the past two weeks that budget support is in the works and that ultra-long bond issuance to boost consumption will be larger than last year. year.

China’s announced stimulus measures will start to take effect this year, but it will likely take some time before a significant impact occurs, Mi Yang, head of research for northern China at real estate consultancy JLL, told reporters in Beijing last week.

Pressure on the commercial real estate market will continue this year and prices could accelerate their decline before recovering, he said.

Rents in Beijing for luxury offices, also known as Grade A, have fallen 16% in 2024 and are expected to fall almost 15% this year, with some rents even approaching 2008 or 2009 levels, according to JLL.

New malls in Beijing opened in 2024 with an average occupancy rate of 72% – previously such malls would not open if the rate was below 75% or much closer to 100%, JLL said. However, within a year, the new shopping centers have reached an occupancy rate of 90%, the consultancy said.

Unlike the US During the Covid-19 pandemic, China has not distributed cash to consumers. Instead, in late July, Chinese authorities announced 150 billion yuan ($20.46 billion) in ultra-long bonds for trade-in subsidies and another 150 billion yuan for equipment upgrades.

China has already spent 81 billion yuan on this year’s trade-in program, officials said this month. It includes more home appliances, electric cars and a discount of up to 15% on smartphones priced at 6,000 yuan or less.

Consumers who buy premium phones tend to upgrade and recycle their devices more often than buyers at the lower end of the market, suggesting the government may want to encourage a new group to shorten their upgrade cycle, says Rex Chen, CFO of ATRenew , a company that stores processing smartphones and other second-hand goods.

Chen told CNBC on Monday that he expects the trade-in subsidy program can increase the recycling transaction volume of eligible products on the platform by at least 10 percentage points, compared to 25% growth in 2024. He also expects the government to conduct a similar trade. -in the policy for the coming years.

However, it is less clear whether the trade-in program alone can lead to a sustainable recovery in consumer demand.

Nomura’s chief Chinese economist Ting Lu said in a report on Tuesday that he expects sales growth to slow in the second half of this year, and tepid new home sales will limit demand for home appliances.

Real estate and related sectors such as construction once accounted for more than a quarter of the Chinese economy. When central authorities started cracking down on developers’ high debt levels in 2020, it had a ripple effect on the economy, in addition to the Covid-19 pandemic.

China changed its stance on real estate in September, following a high-level meeting led by President Xi Jinping calling for a halt to the sector’s decline.

Measures to support the sector include the use of a whitelisting process to complete construction of the many apartments that have been sold but not yet built due to developers’ financial constraints. New apartments in China are usually sold before completion.

Jeremy Zook, chief analyst for China at Fitch Ratings, said the property market has not yet bottomed out and authorities could provide more direct support. He pointed out that it is difficult for the economy to abolish the real estate sector, despite China’s desire to reduce its dependence on the sector for growth.

The government’s latest measures have aided the broader stock market recovery and somewhat improved sentiment.

Sales of new homes in China’s largest cities rose nearly 40% in the past 30 days from a year ago, Goldman Sachs analysts said in a Jan. 5 report.

But they warned that high inventory levels in smaller towns indicate that property prices “could fall further” and that housebuilding is “likely to remain under pressure for years to come”.

In the relatively prosperous city of Foshan — near the city of Guangzhou in southern China — it can take 20 months to clear housing inventory in one district and seven months in another, according to a 2024 report by the Beike Research Institute , a company associated with a major residential sales platform in China.

Overall, the city saw floor space sold last year fall by 16%, to the lowest level in a decade, the report said.

China’s economic problems are complicated by tensions with the US. Similar to Washington’s export controls, Beijing has also made efforts to safeguard national security by prioritizing domestic players in strategic sectors such as technology.

That stance has put pressure on a growing number of European companies in China to localize – despite additional costs and reduced productivity – if they want to keep customers in the country, the EU Chamber of Commerce in China said in a report last week.

Official Chinese statements have also emphasized linking security to development.

A slogan for some of Beijing’s efforts to support growth is an attempt to build.security capabilities in key areas,” noted Yang Ping, director of the Investment Research Institute within the National Development and Reform Commission. She spoke at a press event on Wednesday.

This year, “boosting consumption has been prioritized over improving investment efficiency,” Yang said in Mandarin, as translated by CNBC. “Expanding and stimulating consumption is the main focus of this year’s policy adjustment.”

She dismissed concerns that the impact of trade-in subsidies on consumption would fade after an initial peak, and indicated that more details would emerge after the March parliamentary meeting.