As consumer and business confidence remain low in China, investors are eagerly anticipating this week’s annual economic and political conferences to gauge potential shifts in policymakers’ stimulus strategies.
Uncertain Outlook
Despite hopes for a positive impact on sentiment, analysts warn that the meetings may not provide the desired boost. In fact, they could exacerbate the prevailing pessimism that has led to a 15% decline in the iShares MSCI China exchange-traded fund over the last year.
Key Highlights
Scheduled to kick off on Monday, the simultaneous gatherings of China’s top advisory board and the National Party Congress, commonly referred to as the “two-sessions,” will span approximately a week. Officials are expected to outline Beijing’s primary objectives, including this year’s GDP target and fiscal deficit goal.
Investor Focus
Similar to the scrutiny of U.S. Federal Reserve minutes for subtle shifts in messaging, investors will closely analyze statements emerging from these conferences, particularly Premier Li Qiang’s inaugural government work report.
Critical Juncture
Amid ongoing challenges in the property sector and disappointment with the incremental stimulus measures, Beijing faces a crucial juncture. Confidence has waned, prompting calls for caution from analysts who advise against setting lofty expectations.
Managing Expectations
Leland Miller, CEO of the independent research firm China Beige Book, has cautioned against anticipating a dramatic policy shift resulting from these meetings. Emphasizing the Chinese government’s focus on navigating the property market downturn and curbing excessive credit expansion, Miller stresses the importance of striking a delicate balance to uphold confidence in both financial markets and the broader economy.
Expert Analysis on China’s Economic Outlook
TS Lombard’s Predictions
According to TS Lombard’s Head of Research, Rory Green, a deficit target of 3.2% and a growth target of around 5% are expected for the upcoming year, closely mirroring last year’s growth rate of 5.2%. Green emphasizes that any deviations from these forecasts could significantly impact the market, with downside surprises being more probable. Investor expectations are leaning towards Beijing ramping up its efforts in response to the confidence spiral.
Stimulus Measures on the Horizon
Green foresees additional stimulus measures on the horizon, such as vouchers to boost the consumption of appliances and electric vehicles. Moreover, there is an expected increase in spending in strategic sectors like clean energy, semiconductors, and affordable housing. Despite these efforts, there is concern that such stimulus could exacerbate overcapacity issues, leading to weak pricing pressure and limited revenue and profit growth.
Deflationary Pressures and Investor Behavior
Michael Hirson, Head of China Research at 22V Research, warns that lingering deflationary pressures may deter investors from increasing their spending. The overall impact of the stimulus package could make the economic situation on the ground feel even bleaker, potentially offsetting any positive effects.
Focus on Shifts in Government Priorities
Rayliant’s Chief Investment Officer, Jason Hsu, highlights the importance of monitoring any shifts in the government’s focus from national security to quality growth over mere economic expansion. Last year’s emphasis on national security raised concerns among investors, with a potential reversal being seen as a positive development, albeit not entirely expected at this point.
Stay tuned as China navigates through its economic landscape, balancing stimulus measures with long-term growth objectives.
China’s Economic Focus: From Crackdown to Boosting Demand
As officials in China monitor signs of achievement from their crackdown on leverage in the property sector, a sense of urgency to stimulate demand is growing. Shifting focus towards domestic spending and credit availability could potentially lift near-term sentiment in the market.
Market Stabilization Efforts
Beijing’s strategies to stabilize the market include restrictions on short selling and encouraging state-owned enterprises to make purchases. This approach is enticing value managers, especially in larger-cap stocks, who perceive a possible bottoming out in the market.
The Need for Sustainable Recovery
Despite these efforts, both the markets and the economy require a more substantial catalyst for a sustainable recovery. Hirson, however, remains cautious about the likelihood of this occurring. While lower-ranking officials are displaying a sense of urgency in economic revival, the silence from top leadership—particularly Xi Jinping—conveys a message of staying the course.
Looking Ahead
The absence of a call for the Third Plenum, a crucial meeting that outlines the economic agenda, further adds to uncertainties regarding the economy’s trajectory. While there is acknowledgment of the necessity to reduce negative impacts on the economy, the current scale of pressures and lack of market confidence demands proactive measures to surprise and attract investors.
