China's Actions To Reignite Growth Show Promise - RBC

Amanda Cheesley Deputy Editor 18 September 2023


Frédérique Carrier, head of investment strategy for RBC Wealth Management in the British Isles and Asia, and Dong Chen, head of Asia macroeconomic research at Pictet Wealth Management, discuss the outlook for the Chinese economy, the impact of reforms and how to position global equity portfolios.

With China’s economy being stuck in a morass of low growth of late, Frédérique Carrier, head of investment strategy for RBC Wealth Management, recently highlighted that the authorities are attempting a course of correction, and their approach could be more comprehensive than recognised.

Carrier underlined that housing activity, an important driver of the economy, is struggling and Chinese trade is also shrinking. “The authorities are responding to the economic malaise with incremental measures that pale in comparison to the much more forceful approaches taken to deal with past slowdowns. For instance, to mitigate the impact of the global financial crisis in 2008, China launched a stimulus programme of more than $575 billion,” she said.

“Yet, the authorities are doing a little more than is generally recognised,” she added. This was echoed by Dong Chen at Pictet Wealth Management. Since late August, Chen said that policy support from the Chinese government has picked up pace and strength: “While the measures announced are no ‘bazooka’, they are concrete enough and are being implemented quickly so that they could lead to some real improvement in the near term.” 

“Many of the policy measures are focused on the property sector and have shown some initial signs of effectiveness in boosting housing demand," he said. The central government has asked banks to lower mortgage rates for existing mortgage holders. This acts as a rate cut, but not one which weakens the currency. In addition, the minimum down payment ratio for first- and second-time homebuyers will be lowered. Chen believes that the scope of these policy measures, which exceed market expectations, are likely to boost housing demand and market sentiment. "Meanwhile, the reduced financial burden on many homeowners may help bolster the recovery in household spending, which has been sluggish because of low confidence," he said. "Fiscal measures have also picked up speed,” he added.

According to Carrier, tax relief for small businesses will be maintained until the end of 2027. The authorities have discussed the creation of a more stable business environment, enhancing corporate governance and encouraging entrepreneurship. Other measures include the central government cutting fees for stock market transactions, encouraging restaurants to lengthen their hours of operation, and rural regions subsidizing the purchase of big-ticket items.

“Recent surveys also show some early signs of improvement in Chinese industrial activity, in line with the rising price of industrial commodities in the country,” Chen added. These developments strengthen both Carrier’s and Chen’s conviction that there will be a moderate recovery in the Chinese economy over the rest of this year. “The economy can stabilise from here, though growth may not be as impressive as it had been in the past,” Carrier said.

Carrier forecasts growth of just under 5 per cent this year, slightly below the consensus. She recommends a market weight stance in Asia (ex Japan) equities for global equity portfolios. Such positioning would enable investors to take advantage of Chinese equities’ attractive valuations, in her view, as well as any turnaround in investor sentiment. This is very negative but could easily reverse if these policies start to have a positive impact and/or more measures are announced, Carrier said. 

Nevertheless, Aninda Mitra, head of Asia macro and investment strategy, BNY Mellon Investment Management, thinks that a more meaningful stimulus, especially through fiscal channels, is still needed to help stabilise household demand, overall market sentiment, and sustain a reasonable activity momentum through next year.

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