China on the horizon, for better or worse?

China has long been seen as a beacon of progressive growth in a sea of uncertainty. The past global financial crisis had seen it as a haven for economic growth, especially in Asia. The country is the number one trading partner for many economies, particularly Southeast Asia.

With a burgeoning middle class and a youthful population, although the ageing group is growing too, it is touted as the awakened “Dragon”, soaked in the prospect of surpassing the US as the world’s largest economy by the end of the decade on most optimistic terms.

Pandemic Policy Hits

Such rosiness dimmed during the aggressive COVID-19 policy era, dampening business activity and sinking the country into economic challenges. The initial revenge spending upon lifting the COVID restrictions had started to wane off, with a significant pullback in food and luxury items. Still, economists are seeing a glowing spot in the travel sector, especially during the celebration of the Mid-Autum Festival. We can imagine the robust sales from hospitality sectors and restaurants, yet that has yet to surface, according to a monthly flash survey of 1300 companies released Thursday evening.

The Fallen Economic Pillar

The crack in the property market has been the key culprit. Accounting for a quarter of China’s GDP, stabilizing the sector is an imperative goal for the Chinese government. Despite the streaming of policymakers initiatives, new data may show continued slowing sales and depressed prices for the residential and commercial sectors.

At the highlight of the property woes is Evergrande Group. News is scattering on its effort to restructure, possibly leading to a liquidation that could unnerve investors and damage the confidence of the Chinese economy. The situation was exacerbated when news of its chairman, Hui Ka Yan, was put under police watch for possible “offences”.

A Wishlist for Better Days

So what could change the tide? Some analysts point to the desire for more evidence of recovery, such as improvement in domestic consumption, beyond the travel and dining sector. Any government intervention, such as asset purchase or buyout of balance sheets from key property giants, can pave the wave of renewed confidence. More help could be on the horizon as the Chinese government appeared to resolve the sector’s deep hole.

There’s yet another pressure point. While the Fed maintains elevated interest rates and hints at possible hikes again, Beijing is reducing its rate, potentially softening the renminbi. That could lead to some outflow of investment as investors digest a diverging policy narrative across the two major economic powerhouses.

The data for months ahead may still be muddy as policy lag means a gradual path of recovery, if any. For now, we remain cautious about the Chinese outlook, maintain our positions and welcome more fiscal policy beyond the piecemeal monetary stimulus that has provided sprinkles of hope to a season of drought.