Stimulus or reforms? Investors confused as Chinese leaders grapple with an L-shaped dilemma

Investors have been left scratching their heads as China’s policymakers send out mixed signals on the country’s future economic strategy ahead of a crucial reshuffle at the 19th National Congress due next November.

Last week the official People’s Daily quoted an “authoritative person” in a front-page story as saying China’s economy in the coming years would be “L-shaped”, suggesting a stabilisation following steep declines, rather than “U-shaped” or “V-shaped” trajectories indicating strong rebound after bottoming out.

That statement took the domestic market by surprise as most investors have been expecting a firm economic rebound. The gross domestic product (GDP) grew 6.7 per cent in the first quarter, beating market consensus, following aggressive liquidity injection, policy support for the property sector and greater infrastructure investment this year.

“The GDP growth rate has not yet bottomed out but we think China can tolerate a managed growth deceleration to a low 6 per cent something – a likely level for the bottom of the L – in the coming years, so long as the pace is gradual and does not spin out of control,” said Helen Zhu, head of Chinese equities at BlackRock.

“It is not the number, be it 6 per cent or 5 per cent, that matters the most, but the quality of growth,” she said, adding the Chinese authorities are trying to avoid systemic risks while pushing forward reforms such as reducing overcapacity and restructuring debts.