Peiqian Liu, Asia Economist, comments: “Our base case for The Year of the Dragon is that China will experience a phase of controlled stabilisation, with relatively stable GDP growth between 4-5%, while it continues to address and resolve long term structural challenges.
We do not expect deflation as the cyclical recovery gains momentum, and inflationary pressure will likely remain moderate with headline Consumer Price Index (CPI) well below the government’s outlook of 3%. We think policy momentum will continue to pick up gradually in 2024 and fiscal easing will do the heavy lifting in stimulating domestic demand.”
The Year of The Dragon, according to tradition, is associated with good luck, accomplishment and strength. As many investors in the region prepare to celebrate the Lunar New Year and hope for a better year for markets, our experts consider the investment outlook for China in the year ahead.
Following its initial reopening in 2023, China’s domestic sentiment is stabilising at low levels. As pent-up demand in consumption and services gradually unleashes, China’s economy is normalising and rebalancing. While some sectors face ongoing structural headwinds, such as the property sector, there has been a stronger policy response to offset some of the downside risks. In 2024, Fidelity believes China will continue its cyclical rebound whilst its structural shift continues.
As China’s economy transitions, policymakers have pivoted to nurture new engines of growth, including focusing on green investments, high-end manufacturing and the digital economy.
Changing growth patterns
Fidelity International’s proprietary domestic activity tracker has shown a picture of “dual-track” growth dynamics in China, post pandemic. Services and industrial growth have taken the lead while the property sector has been a drag on growth. This reflects the government’s concerted effort to focus on “high-quality growth” instead of achieving numerical growth targets at any cost.
Peiqian Liu continues: “Within consumption, we expect to see a broadening of services consumption rather than the goods-driven consumption of the old economic model. The tourism and services rebound have been the bright spots in the past few quarters. Growth rate may normalise this year as low base effects fade, but we expect consumption, especially services consumption, to emerge as one of the key growth drivers in coming years. For example, the strong recovery in the Macau gaming sector in 2023 saw the gross gaming revenue reach $19 billion MOP (Macanese Pataca) by December 2023, not far off the pre pandemic level of $23 billion MOP.
“Within investments, beneath the moderate stabilisation of fixed assets investment growth, we have observed a divergent trend between manufacturing and real estate investment. Manufacturing investments have remained robust while real estate investments have been slow.
“Policymakers have shifted priorities from urbanisation-related investments that were largely dominated by property and infrastructure in the early 2000s, including residential buildings, logistics hubs, road, railway and bridges. The new focus aims at efficiently utilising the existing infrastructure to facilitate manufacture upgrade and the building of ‘new’ infrastructure, such as 5G networks, electric vehicle (EV) charging facilities and innovation hubs. These new forms of investment will foster more sustainable growth as China enters the next phase of development, leading more households to middle and high income classes.
“Within trade, exports face more headwinds from lukewarm global demand against a backdrop of structural change over the pandemic. One notable change in export is the value chain upgrade, with China emerging as the top exporter of cars, overtaking Germany, Japan, Korea and the US. At the same time, imports have moderately recovered as domestic demand improved with the support of policy stimulus.”
Engines of the next phase of growth
After a number of notable policy updates in recent months which were kickstarted by the Politburo meeting in July 2023, Fidelity International expects policy momentum to gradually pick-up in 2024. Further policy roadmap announcements to sustain growth momentum should feature in the upcoming Third Plenum, at the local governments’ National People’s Congress (NPCs) and the annual national NPC.
Peiqian Liu continues: “As China’s economy transitions, policymakers have pivoted to nurture new engines of growth, including focusing on green investments, high-end manufacturing and the digital economy. We expect more resources to be deployed into these sectors, contributing to positive long-term growth and partially offsetting some shorter-term structural headwinds.
“For example, the government has pledged a concerted policy effort to build a “Beautiful China”, which includes the adoption of a low carbon development model to reduce pollution and pave the way for its long-term carbon neutrality goal. One beneficiary of this is China’s EV market, as policymakers have pledged to achieve 45% of EV adoption in newly purchased vehicles in China by 2027, with accompanying measures to support the transition. With coordinated policy support, besides green investments, trade also benefitted as China’s EV exports have come up tops in 2023, catching up exponentially following the economy reopening.
“On the consumption front, China is also in transition, which creates areas of opportunity. In response to the ageing population in China, where the population of aged 60 years and older is expected to reach close to 300 million (over 20% of total population) by the mid-2020s, policymakers have rolled out initiatives to support the “silver economy”. This presents a sizeable potential for the economy. The policy support includes better infrastructure and facilities, healthcare services, social and welfare benefits. China’s silver generation’s consumption is estimated to reach RMB19 trillion by 2030, which is equivalent to 28% of total consumption and 9.6% of total GDP.
“As the economy gradually recovers, we expect wage growth to improve alongside an improvement in private sector confidence. Before further strategic guidance is revealed, it is important for investors to remain tactically constructive and nimble. The long-term investment case for China, however, remains intact.”
