China’s shifting policy stance

Economic activity in China has been weakening throughout the year. Not only did the quarter-on-quarter GDP growth rate more than halve in Q2 relative to Q1, but higher frequency data suggests momentum deteriorated further in Q3 (see Chart 1).¹

Chart 1. China manufacturing output and services business activity PMIs ²

Source: LSEG Data & Analytics and EFGAM. Data as at 02 October 2024.

Ongoing weak inflationary pressures augment the case for policy support. China’s consumer price index (CPI) has registered month-on-month deflation three times this year and new house prices have fallen every month since July 2023 (see Chart 2). Furthermore, the GDP deflator has been negative in year-on-year terms for five consecutive quarters.

Chart 2. China’s CPI inflation and new house prices (% change, month-on-month)

Source: LSEG Data & Analytics and EFGAM calculations. Data as at 02 October 2024.

Despite weak indicators of activity, the unemployment rate has remained low.³  This has provided a false sense of security to officials, hiding the fact that businesses have been cutting salaries instead of workers.⁴ 

Against this backdrop, there has for some time been a compelling case for additional policy support. As discussed in previous Macro Flash Notes, China’s conflicting objectives of supporting growth while deleveraging the economy provide a possible explanation as to why such support had not yet been forthcoming.⁵ However, the swathe of measures announced on 24 September suggest that at least in the short-term, supporting growth has become the priority. The measures are summarised in the table below.⁶
 

Table 1. Summary of 24 September policy announcements

Source: PBoC, CSRC and SAFC. Data as at 02 October 2024.

There are two key themes across the announced measures. The first theme reflects broad based monetary policy easing, as signalled by a reduction in the reserve requirement ratio and cuts to a wide range of interest rates, such as the 7-day reverse repo rate, prime loan rates and lending facility rates. Nonetheless, these moves are relatively modest and low inflation in China means real borrowing rates remain restrictive.

Asset price support is the second theme, including measures to support the property market. However, given the scale of issues in the property market, the debt overhang is likely to take some time to unwind and these measures are unlikely to have a meaningful short-term impact.

However, the announced support for the stock market appears more meaningful. The People’s Bank of China’s (PBoC) creation of a swap facility and re-lending loan program - allowing companies to swap illiquid assets for highly liquid ones and borrow money from the central bank for stock buybacks - is likely to be positive for China A Shares in our view.⁷ Indeed, at the time of writing, the CSI 300 Index has risen 25.1% in local currency terms since the close on 23 September.

In isolation, many of these measures would have fallen short of stimulus that could be defined as meaningful. Taken together, they represent the largest and most coordinated package seen in several years and mark a significant shift in policymakers’ approach to stimulating China’s economy. Economic growth is not the only priority for President Xi, but it has clearly moved up the agenda.

While this is positive for China’s economy, it is still unlikely that these measures will be sufficient to generate a sustained demand-driven recovery. Weak inflationary pressures are consistent with excess supply relative to demand. Policies will therefore need to take a more active approach in stimulating consumer demand.

To that end, it is notable that the Politburo meeting on 26 September pledged to “ensure necessary fiscal expenditures”. There is a lack of detail as to what this means thus far. Hence, the next key watchpoint for China will be with regards to details on the size and implementation plans of any upcoming fiscal stimulus package. It is likely that such details are released in the coming weeks, and we will provide any relevant updates when more details are known.

¹ GDP growth slowed from an annualised 1.5% quarter-on-quarter in Q1 to 0.7% in Q2. See previous EFGAM Macro Flash Note, “China’s softening data makes the case for further policy support” https://www.efginternational.com/uk/insights/2024/chinas_softening_data_makes_the_case_for_further_policy_support.html
² A purchasing manager index (PMI) is a diffusion index which takes a value between 0 and 100. 0 indicates contraction, 50 indicates no change, and 100 indicates expansion.
³ The unemployment rate in China has remained between 5.0 and 5.3% in 2024, in line with its pre-Covid levels.
⁴ Based on data from Chinese online recruitment company Zhaopin: https://teamedupchina.com/average-salary-in-china/
⁵ See previous Macro Flash Note, “China’s Impossible Trilogy” https://www.efginternational.com/insights/2023/chinas_impossible_trilogy.html
⁶ The measures summaries were announced on 24 September by the People’s Bank of China, the China Securities Regulatory Commission, and the State Administration for Financial Regulation.
⁷ China A Shares are securities of companies incorporates in mainland China that trade on either the Shanghai or Shenzhen stock exchanges and trade in Renminbi.