With consumer prices in China falling at the fastest annual rate in 15 years, a focal point this year will be on China’s battle against deflation, according to Robert Alster, chief investment officer at Close Brothers Asset Management.

“Growth is expected to stay weak in 2024, perhaps around 4.5 per cent, versus 5.2 per cent in 2023, and a pre-pandemic trend of above 6 per cent,” Alster said in a note. “This reflects weak consumer confidence, softer global manufacturing demand, and the real estate sector suffering the double-whammy of tighter regulation, and less demand.” 

“Beijing is expected to continue announcing measures to support growth, but not enough to boost activity materially. A favoured policy appears to be debt swaps – using higher central government debt issuance to refinance local government borrowing,” he continued. “This helps fund government spending in infrastructure projects. However, what economists are calling for is spending on measures to boost consumer confidence, namely strengthening China’s social safety net,” Alster said. “We are not currently seeing enough of that happening at the moment, and this week’s data further emphasises the need for us to see that now.”

Alster highlighted that investors are looking for a 2015 style “big bazooka” boost but the government is trying to balance supporting growth by controlling financial risks. “Near term, a recovery in growth could boost investor confidence. This could stem from a recovery in global industry, a step-up in policy support or a recovery in consumer confidence. However, China may still face headwinds from the changing global investor landscape,” he said. “Investors are increasingly using emerging markets ex-China indices for asset allocation, with hawkish attitudes towards China becoming more commonplace amongst governments and regulators, providing a headwind to investment inflows to the country."

BNY Mellon Investment Management
Aninda Mitra, head of Asia macro and investment strategy at BNY Mellon Investment Management believes that China’s January inflation slump indicates that its deflationary pressures are not “transitory,” the government remains, in her view, behind the curve in dealing with deflationary pressure. Its focus on boosting infrastructure and manufacturing is resulting in oversupply, price wars, and shrinking margins. Mitra thinks that the policy mix needs to shift more decisively to greater fiscal easing in support of households and consumers. “In the absence of such measures, risks are growing of a Japanification of China’s long-term macro outlook,” she said.

JP Morgan
Rebecca Jiang, portfolio manager of JP Morgan China Growth and Income (JCGI) also believes that Chinese stock markets may face challenges over the coming year. “Moreover, while the recent resumption of high-level talks is encouraging, tensions between China and the US are likely to persist, and an escalation in anti-Chinese rhetoric ahead of this year’s US presidential election cannot be ruled out,” she said. China is also facing the structural demands of transitioning away from its heavy reliance on fixed asset investment, in particular property development.

However, Jiang believes that most of the widely-discussed bad news has been priced in. At these relatively low levels, she sees potential for the market to respond positively to incremental good news. She remains optimistic about the long-term prospects for the Chinese stock markets and the opportunities that will benefit the patient investor. Jiang is encouraged by recent shifts in government policies, designed to promote economic growth and boost consumer confidence.

Aegon Asset Management
However, Gareth Gettinby, investment manager at Aegon Asset Management, mentioned that China began the year as it left off, with soft data met by underwhelming stimulus, continuing concerns about property, and the lack of consumer and private sector confidence. “The prospect of a better year ahead is something investors in the region will be hoping for, as China remains uninvestable for many, particularly the property sector,” Gettinby said.

“The Chinese property market is now in the longest and deepest correction since the late 1990s. There have been various initiatives to help stimulate the property market but so far these have had limited impact. Chinese inflation (CPI) surprised sharply to the downside in January, falling 0.8 per cent year-on-year, the weakest in 15 years,” he continued.

“Prior to the pandemic, Chinese CPI inflation was more than 5 per cent. Part of this current CPI deflation is due to base effects from the timing of the holiday, as the lunar New Year was in January for 2023, and February this year,” Gettingby added. However, one of the main contributors was food inflation, which reported its weakest reading since 1995, falling 5.9 per cent. Ultimately, Gettingby believes that it is difficult to envisage a reflationary environment without a turnaround in the Chinese property market, which will require the government to provide a major stimulus. See more commentary about China’s outlook and investment opportunities and risks here.