China has experienced a rocky recovery post-COVID-19, with national regulatory bodies late last year highlighting that stresses in China’s property market interacting with longer-term financial vulnerabilities are posing serious challenges for its economy.
However, 2024 marks the year of the dragon – symbolising good luck, accomplishment, and strength.
Amid hopes for an improved market year, Fidelity International observed a normalisation and rebalancing in China’s economy, with sectors grappling with structural challenges offset by a robust policy response.
“Following its initial reopening in 2023, China’s domestic sentiment is stabilising at low levels,” the firm wrote in a recent market outlook.
Fidelity’s Asia economist, Peiqian Liu, said the firm’s base case is that China will experience a phase of controlled stabilisation, with relatively stable GDP growth between 4–5 per cent, while it continues to address and resolve long-term structural challenges.
“We do not expect deflation as the cyclical recovery gains momentum, and inflationary pressure will likely remain moderate with headline CPI well below the government’s outlook of 3 per cent. We think policy momentum will continue to pick up gradually in 2024 and fiscal easing will do the heavy lifting in stimulating domestic demand,” Ms Liu noted.
Fidelity has further observed what it termed post-pandemic “dual-track” growth dynamics in China, wherein services and industrial growth have taken the lead while the property sector has been a drag on growth – signifying a concentrated effort to focus on “high-quality growth” instead of achieving numerical growth targets at any cost.
Across consumption, it expects to see an abandonment of old economic models that favour goods-driven consumption and will instead tip towards a broadening of services consumption.
“For example, the strong recovery in the Macau gaming sector in 2023 saw the gross gaming revenue reach $19 billion MOP (market operating price) by December 2023, not far off the pre-pandemic level of $23 billion MOP,” Ms Liu said.
Looking at investments, beneath a moderate stabilisation of fixed assets investment growth was a divergent trend of manufacturing investments remaining robust while real estate investments have been slow.
Namely, policymakers have shifted priorities from urbanisation-related investments to efficiently utilising the existing infrastructure to facilitate manufacture upgrade and the building of new infrastructure, such as 5G networks, electric vehicle charging facilities, and innovation hubs.
Ms Liu commented: “These new forms of investment will foster more sustainable growth as China enters the next phase of development, leading more households to middle- and high-income classes.”
Supporting a ‘silver economy’
China remains in a transition period on the consumption front, particularly in response to the country’s ageing population, with projections that those aged over 60 will comprise more than 20 per cent of its total population by the mid-2020s.
This, Fidelity has said, presents significant potential for the economy, with policymakers having rolled out initiatives to support China’s “silver economy”.
“The policy support includes better infrastructure and facilities, healthcare services, social and welfare benefits. China’s silver generation’s consumption is estimated to reach 19 trillion renminbi ($4.1 trillion) by 2030, which is equivalent to 28 per cent of total consumption and 9.6 per cent of total GDP,” Ms Liu explained.
“As the economy gradually recovers, we expect wage growth to improve alongside an improvement in private sector confidence.”
While the long-term investment case for China remains intact, Ms Liu emphasised the importance of investors to still remain tactically constructive and nimble.
What comes next?
On the back of notable policy updates in recent months which were kickstarted by the politburo meeting last July, further policy roadmap announcements are expected to feature in upcoming local government and Central Committee meetings.
Namely, policymakers have made a point to pivot towards “new engines of growth” comprising green investments, high-end manufacturing, and the digital economy.
“We expect more resources to be deployed into these sectors, contributing to positive long-term growth and partially offsetting some shorter-term structural headwinds,” Ms Liu said.
“For example, the government has pledged a concerted policy effort to build a “Beautiful China”, which includes the adoption of a low carbon development model to reduce pollution and pave the way for its long-term carbon neutrality goal.”
China’s electric vehicle (EV) market is especially set to benefit, with the country’s EV exports surging exponentially in 2023.
Even as exports face more headwinds from lukewarm global demand, one other notable change has been found in the value chain upgrade, with China emerging as the top exporter of cars, overtaking Germany, Japan, South Korea, and the US.