China’s Economic Recovery: Stuttering Steps and Underlying Tensions

Will infrastructure spending and SOE focus be enough to rekindle growth? Experts remain divided.

China’s Post-Pandemic Economic Recovery: Mired in Slow Growth and Deeper Challenges

China’s economic rebound from the COVID-19 pandemic has fallen short of expectations. While the official growth rate of 5% in 2023 might seem positive on the surface, it masks deeper problems causing unease for both Beijing and investors.

Underlying Issues:

• Stalling Property Sector: The long-simmering crisis in China’s real estate market reached a boiling point with the collapse of the giant developer, China Evergrande. This event sent shockwaves through the economy, impacting investor confidence and contributing to the slowdown.
• Stock Market Woes: Reflecting the broader economic anxieties, China’s stock market experienced one of its worst performances in recent memory.

Leadership’s Response:

The upcoming National People’s Congress (NPC) was viewed as a crucial platform for the new leadership, led by Premier Li Qiang, to unveil significant economic stimulus measures. However, Li’s approach prioritized continued spending increases over tax cuts, raising concerns about the effectiveness of the proposed measures.

Lowering Growth Expectations:

The government’s target of “around 5%” growth for 2024 implies an acceptance that the pre-pandemic and pre-Global Financial Crisis growth rates are unlikely to be achieved in the foreseeable future. This signals a potentially new era of slower and more sustainable economic expansion for China.

Additional Considerations:

• It’s important to note that the official growth figures might not fully capture the true picture of the Chinese economy.
• The long-term impact of the pandemic, the ongoing trade tensions with the US, and a rapidly aging population remain significant challenges for China’s economic future.

China’s Stimulus Plan: Infrastructure Surge Amid Lingering Economic Concerns

China’s economic recovery efforts recently received a boost with the announcement of a significant infrastructure investment initiative. This includes issuing 1 trillion yuan ($139 billion) in special bonds, with the stated aim of supporting national strategies and bolstering security capabilities.

Infrastructure in Focus:

Analysts like Wei He of Gavekal Research expect a large portion of the bond proceeds to be directed towards infrastructure projects, marking a return to a familiar economic growth model for China. This is expected to drive double-digit growth in the sector, building upon the 8.2% expansion witnessed in 2023. This focus on infrastructure could potentially help China achieve its targeted growth of “around 5%” for 2024, even with sluggish organic growth drivers.

Balancing Act: Relief for Local Governments, But Questions Remain

One interpretation of this infrastructure push is that the central government is using its financial strength to support economic growth, potentially alleviating the pressure on local governments burdened by off-balance-sheet debt. However, the effectiveness of these measures in boosting investor confidence remains a topic of debate.

Mixed Signals:

While the Shanghai Shenzhen CSI 300 Index’s recent recovery suggests some optimism, analysts like Thomas Matthews of Capital Economics express skepticism about the adequacy of the stimulus package to significantly accelerate growth. He argues that the measures might not be enough to improve the lackluster earnings picture of non-tech sectors in the equity market.

Furthermore, the S&P China ADR Index, representing US-listed Chinese companies, paints a contrasting picture. The index’s performance since the announcement suggests American investors remain unconvinced about the effectiveness of China’s recovery efforts.

While China’s infrastructure investment plan signifies an attempt to stimulate economic growth, questions linger. The long-term sustainability of this model and its effectiveness in addressing underlying economic challenges remain to be seen.

China’s Balancing Act: Can State-Owned Enterprises Carry the Economic Load?

China’s economic recovery faces a complex challenge: balancing the current performance of state-owned enterprises (SOEs) with the need for a vibrant private sector.

SOEs: A Beacon of Stability?

The recent performance of the MSCI China Index, driven by SOEs, has attracted investors seeking strong return on equity (ROE). Analysts like Winnie Wu of Bank of America anticipate the trend to continue due to SOEs’ increased focus on shareholder returns and financial discipline.

Concerns and Contradictions:

However, concerns remain. While the 2024 economic targets suggest a cautious approach to avoid excessive debt and yuan weakness, there is a broader question about stimulating long-term growth.

Unlocking Foreign Investment: The Private Sector Dilemma

Experts like Mansoor Mohi-Uddin acknowledge that a stronger private sector is crucial for attracting foreign investment, especially after facing government restrictions in recent years. However, Thomas Matthews of Capital Economics highlights the potential gap between Beijing’s promises and concrete action. Simply changing tone might not be enough to convince investors and private firms. A fundamental tension exists between respecting market forces and achieving strategic goals of self-sufficiency and resilience.

The Long March to Recovery:

China’s economic journey is far from over. Authorities face the challenging task of preventing fiscal slippages while fostering sustainable growth, potentially in the near term, to recover pandemic-related losses. This path will likely involve difficult choices and require substantial dedication and discipline to achieve success.