China’s economic outlook has been a key focus for global markets, especially as recent data reveals ongoing challenges. With property market struggles, weak consumer demand, and structural issues like an ageing population, China is moving towards aggressive fiscal stimulus to reignite growth. This shift holds significant implications for Australia, given the two nations’ close economic ties, particularly in exports and commodities. Here’s a breakdown of what the latest developments in China could mean for Australia and investors.
I. Key Points
- China is expected to see a mild cyclical upswing driven by fiscal stimulus and support for the property market.
- Long-term structural problems, such as demographic decline, high savings rates, and growing government intervention, are unlikely to be fully addressed by these measures.
- Australia’s economy, while less sensitive to China than before, will still benefit from a cyclical boost in demand for exports, resource shares, and a stronger Australian dollar (AUD).
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II. Introduction
Concerns over China’s economy have intensified due to weak data, plummeting property prices, and a bearish stock market. In response, the Chinese government has adopted aggressive stimulus measures. This post examines the effectiveness of these actions and their implications for Australia and investors.
III. Cyclical Slump
China’s economy has been under pressure due to a combination of factors:
- Property market collapse: Property sales have slumped by 25% in 2024, dragging down related sectors.
- Cautious households: High unemployment and falling wealth have limited consumer spending.
- Low inflation and deflation: Weak domestic demand is reflected in the deflation of producer prices, indicating spare capacity in the economy.
IV. Structural Problems
China faces deeper, structural issues that could impede long-term growth:
- Excessive savings: With a savings rate of around 45% of GDP, much of this capital is inefficiently recycled through debt into investment, creating an overhang in both export-related and property investments.
- Demographic challenges: A shrinking workforce and an ageing population are weighing on growth and property demand.
- Government intervention: Rising state involvement in the economy has hindered entrepreneurial growth, exacerbating the risk of falling into the “middle-income trap.”
V. Will Policy Stimulus Work?
China’s recent fiscal and monetary measures are likely to alleviate some of the cyclical issues but are insufficient to address the long-term structural challenges. Although the measures are expected to boost growth temporarily, especially in 2025, reversing the demographic decline and curbing excessive savings remains an uphill battle.
VI. Recent Stimulus Announcements
China’s central bank has rolled out multiple measures, including:
- Lowering reserve requirements and interest rates.
- Reducing downpayments on second homes.
- Financial support for brokers to invest in shares.
The Politburo has also committed to increased fiscal spending, with an expected stimulus of around 2 trillion Renminbi (A$420 billion), which is anticipated to stabilise property prices and lift growth to approximately 5.5% in 2025.
VII. Effectiveness and Outlook
While the stimulus measures may provide a short-term boost to growth, structural issues like high savings, demographic decline, and fiscal imbalances will persist. Consequently, China is likely to see a longer-term trend of slower growth, falling from 10% in the 2000s to a projected 3% in the next decade.
VIII. Implications for Australia
Although Australia’s economy is less tied to China than in the past, a Chinese stimulus-driven recovery will still benefit key sectors:
- Export demand will rise, supporting commodity prices, particularly iron ore.
- Resource shares and the AUD are likely to perform well, though the impact on government revenue will be weaker than during previous upswings due to more modest growth expectations.
IX. Implications for Investors
Investors stand to benefit from a reduced risk of global recession and potential upside in Chinese shares. Australia’s share market may continue to underperform slightly, but the improving AUD and global growth outlook could offer support. A narrowing interest rate gap between Australia and the US could also bolster the AUD further.
*The above was sourced from AMP’s Shane Oliver’s insights. Original report here