As China enters the fifth year of its real estate crisis, chief market strategist at Lazard, Ronald Temple, said the country’s economy is at a critical point.
“Policy interventions to date have failed to cement a floor for housing prices and consumer confidence, and excessive reliance on goods exports appears to be threatened due to US trade policy shifts,” he said.
Companies increasingly view China’s supply chain and capital dependence as risky and are already seeking alternative production locations. All the while, investors continue to wait for a large fiscal stimulus package and structural reforms.
As Temple explained, this perfect storm of factors has kept consumer confidence stubbornly low, leading Chinese consumers to prioritise saving.
“A higher savings rate is the opposite of what China’s economy needs, as excess supplies of manufactured goods continue driving deflation and increasing the country’s reliance on exports to sustain current economic activity levels,” he said.
To counter this crisis of confidence, Temple proposed a combination of major structural reforms and a large-scale fiscal stimulus program – specifically incentivising consumption.
He said that although the central government has announced dozens of stimulus measures in recent years, most have focused on monetary policies aimed at stimulating more borrowing.
“The only effective demand stimulating measures in recent years have been subsidies for consumer durables and for electric vehicle purchases, but these subsidies pull forward demand rather than sustainably increasing it,” he said.
Andrew Swan, portfolio manager of the Asia Opportunities Fund at Man GLG, agreed, saying that from an investor’s perspective, the question is “whether or not China is finally going to take this consumption issue seriously and start to pivot the economy”.
He said the announcement of China’s next five-year plan is the space to watch.
According to Temple, structural reforms relating to the social safety net and government funding sources rather than temporary spending incentives are what’s needed.
He pointed to the 180 million elderly Chinese citizens who subsist on an average basic pension of approximately $33 per month, forcing Chinese workers to save relentlessly during their working lives, lest they face destitution in retirement.
He said initiating a multi-year, significant increase in pension payments is crucial to counter this issue.
He also elaborated on the country’s challenges emanating from housing policy failures, such as the 2020 “Three Red Lines” policy, which initially aimed to curb the bloated property sector but instead impacted the revenue of local governments who were heavily reliant on land sales.
While property taxes have been considered, he said he views a widespread shift as unlikely, meaning that alternative revenue streams are needed to rebalance the economy away from real estate.
At the same time, Temple explained that China’s issues are not just domestic, as the nation also faces trade-related headwinds from the US trade war.
The weighted average tariff imposed by the US on Chinese exports is now 28 per cent, making 15 per cent of Chinese exports less competitive and prompting companies to reallocate capital to other countries.
This is reflected in the rapid shift of foreign direct investment (FDI) away from China and into other emerging markets since 2021: in three of the last seven quarters, China’s FDI was negative, according to Lazard.
Despite this, Temple pointed to some recent signs of potential stabilisation.
Notably, after two years of monetary policy easing, total social financing (system-wide credit) has begun to accelerate marginally, according to the People’s Bank of China. This could help stimulate China’s sluggish economy.
The “Liberation Day” tariffs imposed on China are also nowhere near the eyewatering highs first announced between 110 to 115 per cent, according to Yale Budget Lab.
Importantly, China’s overwhelming dominance of rare earth elements has been proven to give the country significant leverage in its ongoing trade negotiations with the US.
“The United States has been more anxious to reach a deal than China has, as US companies faced the prospect of idling manufacturing facilities in the absence of key inputs from China,” Temple said.
Speaking at the GSFM mid-year briefing this week, Swan agreed, adding that he expects China to “pull this card” at some point.
Ultimately, Temple said the likelihood of China’s economy derailing and entering a recession hangs in the balance of the US capitulation on trade – making such a negative outcome unlikely.
At the same time, he concluded that he expects China’s growth to remain sluggish throughout the rest of 2025, despite many economists predicting the announcement of a substantial fiscal stimulus package to ease the pain.
“That package is nowhere to be found”, he said.
Elsewhere in the global economy, Temple said he expected volatility in the months ahead.
Unites States
While the United States has performed exceedingly well so far in 2025 with decelerating inflation, a resilient labour market and a strong lead in artificial intelligence, he predicts the economy to head towards stagflation in the coming months, with higher inflation and slower gross domestic product growth.
Eurozone
Following the trade deal reached with the US this week, Temple said the economy is likely to suffer some turbulence in the near term. Despite this, he predicts the growth from the first half of the year to continue, owing to the German stimulus package and monetary policy easing by the European Central Bank.
Japan
According to Temple, Japan could be at an inflection point, with inflation normalising over the last four years. Owing to corporate governance and takeover code changes, companies have become more shareholder-friendly. Japanese companies and investors could be at the start of a long-term improvement story.
