Economy Watch | China

Limited and Highly Targeted Stimulus is Likely an Attempt to Boost Some Sectors

November 30, 2023

Trusted Insights for What's Ahead™

• Status of China’s Economy – The Chinese economy is showing signs of weakness going into Q4, both on its supply and demand sides. This is in line with our view that the stronger-than-expected growth in Q3 was driven by a short-lived release of pent-up demand, and thus not indicative of a broader recovery in confidence levels. While support has accelerated, it has not yet proven sufficient to bring about a broad turnaround. This is unlikely to change due to the government’s commitment to preventing systemic risks, which limits the extent of stimulus it can deploy.
• Investment Trends – Fixed asset investment growth stayed relatively stable in October, but there is a continued downward trend. It went down from 3.1 percent y-o-y in Jan-Sep to 2.9 percent in Jan-Oct. The front loading of local government bonds issuance has been a key driver of infrastructure investment; and while most of this year’s local government bond quota has been used, the government has issued more support, specifically a RMB 1.5 trillion local government debt swap program and RMB 1 trillion special government bond issuance. This will support growth in infrastructure and manufacturing investment, but the continued contraction in property investment will be a major drag on the economy overall.
• Consumption Trends – October retail sales went up by 7.6 percent y-o-y, up from 5.5 percent in September. This was on the back of a very low base in October 2022, when y-o-y growth dropped to -0.5 percent. Despite seemingly positive data month-to-month, the growth momentum in consumption is actually moderating. Looking ahead, Q4 headline growth will continue to look deceptively strong thanks to last year’s low base. 
• Trade Trends – Despite a favorable base effect, export growth contracted further in October, dropping -6.4 percent y-o-y, down from -6.2 percent in September. The manufacturing PMI’s new export orders sub-index remained below the 50-mark, suggesting that export growth will continue weakening. Because of the global economic slowdown and heightened geopolitical risk, we continue to see little short-term upside for exports.
• Implications for Business – As expected, the Chinese economy weakened in October. It seems increasingly likely that the government will roll out a second batch of small, targeted stimulus measures in the coming months, which will help support growth in Q4. However, we believe this won’t be sufficient to generate an upcycle. Achieving a recovery in business and consumer confidence levels will be a protracted process. MNCs will continue operating in an environment of softening demand, making it more challenging for them to defend their market shares.