Hello,
We are in big bank and institutional forecasting season. Except for Bank of England set pieces and random ONS statements, I’ve often found Westminster’s foreign policy caucus largely insulated from these types of reports and summaries. Perhaps that reflects wider discomfort with financial and economic data, a mistrust of the big banks and similar institutions, or just simply a lack of resources available to find and then digest them.
I’m of the view that it’s worth injecting the key points from these outlooks into the wider thinking around China in the UK. The incentives that govern the analysis presented in these reports are different from those that govern media or political coverage: to this end, they sometimes appear to go against the prevailing narratives we read in the papers or hear from politicians. Readers can make their own assessments as to how accurate each party is in its views.
Today’s briefing note examines the key China points from the following outlooks:
BNP Paribas Asset Management
Blackrock
UBS
Goldman Sachs
Barclays
Lazard
Fidelity
JP Morgan
The cheat sheet for what these institutions predict is as follows:
Economic Growth and Challenges:
China's GDP growth forecasts for 2023 and 2024 range between 4.5% and 5.0%, with a general expectation of a slowdown due to factors like property market downturns, demographic challenges, and shifts in global value chains. Despite challenges, some forecasts suggest a potential for growth stabilization or even a rebound in certain sectors.
Policy Responses and Market Sentiments:
There's an emphasis on the Chinese government's policy responses to economic challenges, including the possibility of aggressive fiscal expansion and monetary easing to stimulate growth. Investor sentiment in 2023 was generally bearish due to debt and property market issues, but there's potential for improved confidence and market recovery in 2024.
Structural and Strategic Shifts:
China is undergoing significant structural transformations, shifting towards sectors like 'hard tech' and adjusting its economic model to balance investment and consumption. This includes strategic efforts to stimulate industrial migration and boost GDP growth, alongside addressing long-term challenges such as education, healthcare, and climate change.
BNP Paribas Asset Management
Executive summary
BNP’s team opens its report by noting that “Volatility is the new normal,” and argues “in 2024, financial markets will continue to focus on the outlook for growth and inflation, and what that implies for the valuations of assets that are particularly sensitive to monetary policy and the state of the economy. But the markets do not just dance to such a short-term cyclical tune.”
On China, it argues “many investors failed to predict the trajectory of growth…the belief had been that China would experience a reopening like the ones seen in the US and Europe, with significant pent-up demand after three years of zero Covid policies poised to spur strong growth.” However, until Beijing “takes more forceful measures to address insolvencies among property developers, and indebtedness among local governments that depend on property sales for revenue, economic growth will likely continue to disappoint.” Notably, BNP believes that “[t]rade relations with the US will probably also remain difficult, regardless of who is next elected to the White House.”
That being said, BNP “take a long-run view. Resolution of the current cyclical problems could be achieved through aggressive fiscal expansion, facilitated by monetary easing. This would boost growth and help asset prices recover in 2024.”
Key points
Investor Sentiment: In 2023, global investors were generally bearish on China due to worsening debt and property market issues, as well as dissatisfaction with Beijing's response to post-pandemic recovery challenges.
GDP Growth Outlook: The forecast for China's GDP growth in both 2023 and 2024 is between 4.5% and 5.0%. However, this outlook led to a drop in stock markets, despite cheap valuations.
Debt Burden: Contrary to some opinions that China's large debt burden limits its economic policy options, evidence suggests that this debt is manageable and does not constrain Beijing’s economic policy choices. The weaker growth post-pandemic is attributed to Beijing's shift away from a debt-fueled supply-expansion growth model.
Policy Easing: There's a possibility of a sustained rebound in Chinese stocks in 2024 if the authorities continue assertive policy easing.
Structural Transformation: Beijing's approach has shifted towards 'hard tech' (hardware and components for strategic and high-tech industries) rather than 'soft tech' (e-commerce for non-strategic consumer demand). This strategic shift is intended to stimulate industrial migration to interior provinces and boost GDP growth and productivity.
Investment and Consumption Balance: The document suggests that the mantra 'invest less, consume more' is not suitable for China at this stage. Many under-developed regions in China still require investment to stimulate growth in consumption.
Debt-Financed Growth Model: The high level of savings and investment in China supports the idea that a high level of debt can be sustainable if backed by assets, which is believed to be the case for China.
China's Investibility: The economic recovery in China post-COVID has been fragile, mainly due to cyclical problems. However, aggressive fiscal expansion, supported by monetary easing, could help resolve these issues and boost growth, thereby aiding the recovery of asset prices in 2024.
Long-term Investment Themes: China faces many crucial tasks, such as improving education and healthcare, reforming the labour market, addressing pollution and climate change, and reducing the debt ratio. These challenges are seen as long-term investment themes for the country.
Taiwan: The document states that geopolitics is increasingly complex and that even with tensions around Taiwan, “it is not currently possible to assign meaningful probabilities to potential outcomes.”
BlackRock
Executive Summary
BlackRock’s document is short and punchy. With a specific focus on biotechnology and AI, it briefly touches on China through discussions around emerging markets (EM) and supply chains.
Key points
China's Unique Position in Emerging Markets: The document notes that China makes up 30% of emerging markets. Due to its large size and unique opportunities, challenges, and nuances, investors are increasingly treating China distinctly from other emerging market countries.
Modular Approach to Investment: There is a growing trend among investors to adopt a modular approach, segregating China-specific investments from other emerging market holdings. This strategy allows investors to adjust their exposure to China independently from their investments in other emerging markets.
Goldman Sachs Economics Research
Executive Summary
Goldman Sachs opened their fairly positive note by stating “[t]he global economy has outperformed even our optimistic expectations in 2023.” The report anticipates further disinflation, expecting core inflation to fall to 2-2.5% by the end of 2024, and assesses a limited recession risk, with only a 15% probability in the US. On China, it predicts that “[n]ear-term growth in China should benefit from further policy stimulus, but China’s multi-year slowdown will likely continue.”
Key points
2023 Economic Performance: China's economic rebound in 2023, following its reopening, was somewhat disappointing. However, the growth still outperformed both Goldman Sachs and consensus forecasts from the previous year.
2024 GDP Growth Forecast: China's GDP growth is expected to slow to 4.8% in 2024. This slowdown is attributed to the diminishing impact of the reopening and a continuous drag from the property sector. Despite this, growth is anticipated to be supported by a slightly smaller housing drag, a modest rebound in global trade, and additional policy easing, particularly in the first half of 2024.
Long-Term Economic Challenges:
Property Downturn: The ongoing property market downturn in China is expected to persist, with risks of entrenched pessimism affecting economic sentiments.
Demographic Challenges: China faces demographic deterioration with a shrinking working-age population, necessitating a reinvention of its growth model.
Global Value Chains: A modest cyclical rebound in exports is unlikely to counteract the diversification of global value chains away from China towards other countries.
Decadal Growth Outlook: Over the next decade, China's trend rate of growth is expected to continue slowing, reaching just 3%—a significant reduction from the pre-COVID norm. This outlook underscores the challenges China faces in maintaining its historical growth rates amidst internal and external economic pressures
Barclay’s Private Bank
Executive Summary
Unique in this list as a British bank, the section of this report most interesting to British policymakers and researchers may well be this:
“Among the knowns for 2024 are two major elections in the US and the UK. At this stage, it is too early to speculate as to which party will be elected and on what platform. One thing is clear though, the political uncertainty in these countries will ramp up as we close in on the final quarter of the year.”
The bank also takes a gander at Asia, arguing investors “will also have to account for a potentially contentious presidential vote in Taiwan. Irrespective of their political inclinations, governments around the world will come under more pressure to address ballooning debt burdens and excessive deficits. Financial markets could morph into fiscal referees, arbitrating the appropriateness of any new spending plans.”
Key points
Economic Growth: China's economy is expected to grow by around 4.0% in 2024.
Challenges Facing the Economy: The country faces several headwinds, including:
An exports-driven economy suffering from slow growth in developed markets and trade tensions.
The domestic real estate sector is struggling and needs profound restructuring.
Chinese consumers are focused on reducing debt, leading to a "balance sheet recession."
Government Stimulus and Economic Momentum: The limited government stimulus measures in 2023 have not significantly lifted growth. While a more substantial fiscal boost is needed for a significant output increase, China’s economic momentum appears to have reached its lowest point and may start to recover.
Outlook for 2024: The outlook remains cautious, with growth expected to remain subdued due to ongoing deleveraging. However, there is potential for positive surprises, given the current pessimistic view among economists.
Inflation Trends: Unlike many developed nations, China has not faced significant inflationary pressures in 2023. In fact, the country experienced a brief deflation in July. The headline consumer price index (CPI) is expected to increase gradually, with an average of 1.6% in 2024. This situation allows room for further fiscal and/or monetary stimulus.
Opportunities Amidst Challenges: Despite the uneven and uncertain short-term outlook, the lack of inflationary pressures enables the People's Bank of China to maintain an accommodative monetary policy. The Chinese government remains focused on its long-term objective of "Common Prosperity," aiming to raise incomes for the less well-off, promote fairness, and encourage balanced regional development. This focus could lead to the acceleration of structural reforms, potentially opening up new opportunities for investors.
Lazard
Executive Summary
Lazard’s Chief Market Strategist Ronald Temple provides by far the most comprehensive overview of China’s economy. The group claims “the root cause of the economic lethargy [in China] are problems in the real estate industry which have affected property developers and municipal finances, and have ultimately contaminated the broader economy,” and notes that because housing represents 60-70% of assets for the median household in China, it is also a deeply psychological issue too.
However, in his concluding remarks, he argues “I believe sentiment regarding China has gotten too negative, given the array of recent stimulative measures and the sharpness of the decline in new housing construction, which has already occurred and will likely lead to stabilization in building activity in 2024. Moreover, there are signs of consumer confidence and spending bottoming, suggesting near-term improvement is at hand. Another positive is that China has become the largest exporter in critical strategic sectors like electric vehicles (EVs) and solar and wind power. In EVs, for example, China went from a net importer in 2019 to the largest net exporter in 2023. Similarly, China has embedded itself within the renewable energy supply chain, which should lead to growing Chinese exports as demand for components grows. By positioning itself as the low-cost producer in high-growth sectors of the global economy, China has likely secured additional growth for years to come, even if it might be blocked from US markets in some cases.”
Looking to the year ahead, Lazard expresses the most detailed analysis and overview of all the outlooks about Taiwan. It notes:
The upcoming early 2024 Taiwanese election is crucial. The Democratic Progressive Party (DPP), which leans towards a formal declaration of independence and is currently leading in polls, is a concern for Beijing.
Chinese military activities, including increased air incursions into Taiwan’s air defence identification zone, are escalating tensions in the region. The absence of military hotlines or measures to avoid escalation between China and the US exacerbates the risk of further conflict, making the February Taiwanese elections a key event to watch.
The US-China rivalry and China’s stance on Taiwan are causing supply chain fragmentation. Trade tariffs and pandemic-induced disruptions have led to a shift towards “friendshoring” or “nearshoring” strategies by advanced economies, contributing to economic fragmentation, which may temporarily hinder global growth and fuel inflation.
Key points
Consumer Confidence: Post-COVID reopening in China did not boost consumer confidence as expected. While consumers returned to activities like dining out and going to cinemas, big-ticket purchases were largely avoided. This reflects a broader sentiment of economic negativity among consumers.
Real Estate Sector Crisis: A significant issue is the crisis in the real estate sector, which accounts for 15-30% of China's GDP. Problems in this sector have affected property developers and municipal finances, ultimately impacting the broader economy. Housing also represents 60-70% of assets for the median household in China, meaning changes in housing prices significantly impact consumer psychology.
Overdevelopment and Speculation: From 2000 to 2010, there was substantial housing development in China. However, eventually, supply began to exceed real demand, with speculators filling the gap, leading to rising home prices. The government's crackdown on excessive leverage in the sector and its campaign against speculation has precipitated a crisis in real estate development.
Financial Difficulties in Real Estate: Many private real estate developers are facing financial difficulties, with about 50% of the largest developers defaulting on their debts. This has eroded consumer confidence in the housing market and the belief that home prices always rise.
Stimulative Measures by the Government: In response to the faltering economy, Chinese authorities have implemented numerous stimulative measures, including fiscal deficit adjustments and monetary policy easing. These measures aim to prop up the economy and stimulate demand for housing.
Export Growth in Strategic Sectors: China has become the largest exporter in critical strategic sectors such as electric vehicles (EVs) and renewable energy. This positions China for growth in high-demand areas, despite potential market access challenges in some regions like the US.
US-China Relations: Since mid-2023, there has been a thaw in US-China relations, with prospects for improved trade relations in the near future.
Economic Model Shift: China's long-term challenge is its heavy focus on investment at the expense of domestic consumption. Signs of change are emerging, with a greater share of bank loans going to the industrial sector rather than real estate. However, the government seems reluctant to shift away from its investment-heavy model, which has been successful since the 1990s. A more robust social safety net could encourage consumption and support economic growth.
Fidelity International
Executive Summary
Fidelity sees “three different macro scenarios as the likeliest pathways for the country’s economy in the year ahead,” and takes the the bold and entertaining step of giving each a probability.
Controlled stabilisation: recovery gradually accelerates as the property sector stabilises and consumption picks up. 65% probability, in which the economy grows around 4 to 5% in 2024.
Serious slowdown: the economy takes a double hit from both domestic structural challenges and an external demand slowdown. Policy support coming up short would tip the ailing property market into a more meaningful decline. In response, credit risk for local government debt would rise as land sales, a major source of local governments’ fiscal revenue, shrink further. 25% probability.
Period of Reflation: China reverts to its old economic playbook, propping up growth by government overinvestment and rekindling a property boom. Policymakers would go beyond cyclical easing measures to bail out both property developers and cash-strapped local government financing vehicles, fuelling a renewed credit binge in the public and private sectors. Inflation accelerates. Business and consumer confidence is resurgent. Real estate’s reprise boom drives a broad-based recovery across the economy. 10% probability.
Key points
Challenging Recovery Path: China's path to economic recovery has been more challenging than anticipated. The complexities of China's economic situation require a unique set of scenarios tailored specifically for 2024.
Beijing’s Growth Targets: Despite the rocky recovery, Beijing is expected to hit its growth targets for the year. However, the focus will be on controlled stabilisation rather than aggressive expansion. This approach suggests a cautious and balanced strategy by the Chinese government in managing economic growth amidst global and domestic challenges.
Macro-Economic Context: The broader macroeconomic environment includes factors like the US election year, the ongoing Russia-Ukraine war, and potential geopolitical shifts in Europe and Asia. These external factors contribute to a volatile global economic landscape that China needs to consider in its policy-making.
UBS
Executive Summary
In general terms, UBS makes several predictions for the coming year. They expect “slower growth for the US economy in 2024 as consumers face mounting headwinds. We expect Euro- pean growth to remain subdued, and China to enter a “new normal” of lower, but potentially higher-quality, growth.” On the political front, they argue that “politics [will] have an out-sized role in 2024. The US presidential election, the Israel-Hamas and Russia-Ukraine wars, and the ongoing rivalry between the US and China could all have global market repercussions. And political decisions to engage in large and unfunded fiscal spending create both upside and downside investment risks to base case economic forecasts. To this end, investors should “prepare to hedge market risks. We see capital preservation strategies, macro hedge funds, oil, and gold as hedges to focus on in 2024.”
The bank says of Taiwan that it expects “mutual interest in cross-strait and US-Taiwan cooperation to continue.”
Key points
GDP Growth Projection: China's economic growth in 2024 is projected to be 4.4%, which is lower than the estimated 5.2% growth in 2023. This reduced growth rate is attributed to several factors including muted consumer spending, slow external demand, and challenges in the property sector.
Shift from High Growth Era: UBS suggests that China is entering a "new normal" of growth, marking a departure from the era of over 6% annual growth. This shift is due to various long-term factors such as a shrinking labor force, structural limits to trade-driven growth, and a fragile geopolitical balance.
Continued Role as a Growth Engine: Despite these challenges, the outlook for China remains optimistic in certain aspects. Beijing has announced a significant bond issuance program (CNY 1 trillion), which could boost GDP growth by 0.4-0.8 percentage points and potentially indicate more policy actions in 2024. Furthermore, in the longer term, sectors such as consumer spending, carbon transition leadership, and industrial supply chain upgrades are expected to drive durable and quality growth for the Chinese economy
JP Morgan Private Bank
Executive Summary
Those looking for grand geopolitical and geoeconomic predictions are better served elsewhere. JP Morgan focuses on other issues, arguing the following: inflation is expected to stabilise, yet hedging against it remains prudent through options like equities and real assets. Although cash yields are appealing, they may have peaked, suggesting caution. Meanwhile, bonds now offer more competition to stocks as interest rates have adjusted, making it an opportune moment to secure higher yields, while equities, driven by consensus and AI advancements, are likely heading towards new peaks. For investors, the contained stress in credit markets presents an opportunity to capitalize on distressed real estate and private credit.
Key points
The bank is remarkably vague in its China predictions. It notes “China may continue to balance the competing interests of alleviating leverage in the property sector while supporting domestic consumption.”
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