3 questions about the future of China

PUSH China 2024 began in uncertainty with an economic recovery struggling to kick-start and also beginning to affect investor confidence.

According to analysis by several experts, the dragon’s investment history in the last year has been overshadowed by internal problems related to economic sectors in crisis (with the collapse of the real estate sector) and others rising tensions with the United States.

These questions remain to be resolved in early 2024. The country is also exploring new territory as it stabilizes in a lower growth range than it has in past years.

In an uncertain and crisis global context, between wars, high inflation, weak global demand and doubts about the energy transition, even the Chinese giant seems to be faltering. All the doubts about China that are holding investors back can be summed up in 3 questions that emerged from CNBC’s analysis.

1. What will be the stimulus for the Chinese economy?

The attractiveness of China as a rapidly growing market weakens as the economy matures.

Many were disappointed when the Chinese economy did not recover as quickly as expected after the end of the Covid-19 controls in December 2022. In addition to tourism and some industries such as electric carsslow growth was dominant for most of 2023, trending downward real estate issues AND export collapse.

“Policy response is essential to consolidate recovery momentum”analysts at Citi said in a Jan. 3 report.

They expect it to be in January People’s Bank of China it can lower rates such as the required reserve ratio or the amount of funds lenders must hold as reserves. This year, total GDP is also expected to grow by 4.6%.

Beijing announced a series of policies of gradual support, but the impact was not immediate. In mid-December, China’s top officials held an annual meeting to discuss economic policy for the coming year. Official data showed no significant stimulus plans, but they were listedtechnological innovation as the first work area.

Among key upcoming government meetings, Beijing will unveil detailed economic targets at a parliamentary meeting in early March.

Whether or not China will stimulate growth is the big question waiting to be answered.

“My picture is that China will not offer a significant stimulus”Liqian Ren, quantitative investment leader at WisdomTree, said in late November.

Beijing’s efforts will be focused on promotion “high level of growth and quality”rather than debt-driven growth according to the expert.

2. What will happen to the real estate sector?

The the real estate market crashed after Beijing cracked down on developers’ high reliance on debt in 2020.

But the sector’s close ties to local government finances, the construction supply chain and home mortgages have raised concerns about wider economic spillovers.

“China’s asset crisis has been the biggest obstacle to economic recovery from zero-Covid restrictions at the end of 2022”analysts at Goldman Sachs said in a Jan. 2 report. “Home sales and construction starts plunged in 2021-22 and continued their net decline in 2023.”

“However, the pace of decline in demand has slowed and we expect to see a bit more stability in 2024”analysts added.

Although the real estate situation is deteriorating “It’s gradually stabilizing, it’s hard to see a turning point”said Ding Wenjie, global equity investment strategist at China Asset Management Co., according to a CNBC translation of his remarks in Mandarin.

He expects political support to increase in 2024 as authorities shift from a focus on risk prevention to promoting progress while maintaining stability.

3. What growth opportunities?

While it is clear that Beijing would like to reduce the real estate sector’s contribution to China’s GDP, it is less certain whether new growth engines can fill the gap.

According to Citi analysts, machinery, electronics, transportation and batteries accounted for a combined 17.2% of China’s economy in 2020.

That means such manufacturing areas could offset resistance from the real estate sector, analysts said. But they emphasized that economic transition it cannot happen overnight as it requires addressing the skills mismatch in the labor market and adapting the supply chain that has been built to support real estate development.

Despite macroeconomic challenges, Beijing has signaled its desire to boost domestic technology and advanced manufacturing. China AMC’s Ding said high-end manufacturing sub-sectors could benefit from a recovery this year global technology cycle. Examples include those related to consumer electronics and computers.

It also expects producer prices to return to growth at the end of the second quarter, boosting earnings per share by around 8% to 10% in China. Another area his team is looking at is Chinese companies that are growing global revenue.

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