Macroscope | Hold the bazooka: weak China growth, low stimulus is new normal

Last weekend, International Monetary Fund managing director Kristalina Georgieva told delegates attending the China Development Forum in Beijing that China’s economy was “at a fork in the road – rely on policies that worked in the past, or [implement reforms] for a new era of high-quality growth”.

If only the choice facing Beijing was that straightforward. In the past year or so, Chinese policymakers have struggled to bridge the divide between the old engines of growth – property and related industries still account for nearly a quarter of economic activity – and the new ones, such as electric vehicle and battery production as well as wind and solar power generation.

However, as Goldman Sachs noted in a report published last October, the problem is that the new drivers of growth are not big enough to offset the drag from the decline of the residential property sector. Although the drag is likely to fade in the coming years, the net impact on growth will still be negative in 2027 even if China’s economy expands at a faster pace than anticipated.

This partly explains why the government has stepped up support for the crisis-ridden housing market. Beijing has intensified pressure on banks to assist vulnerable developers, cut mortgage rates to stimulate demand and provided low-cost financing to the urban village renovation and affordable housing programmes.

It also explains why investors – particularly foreign investors – expect Beijing to ramp up stimulus measures later this year despite growing doubts about their efficacy. The findings of Bank of America’s latest Asia fund manager survey, published on March 19, revealed that the largest percentage of respondents wanted to see “credible signs of [policy] easing” before adding exposure to Chinese stocks. Moreover, nearly 90 per cent of respondents expected looser monetary policy in the next 12 months.

These views help shape a narrative around China that has taken hold in recent months, one that pervades the research reports of many Wall Street banks. The gist of it is that China’s economy has bottomed out and more forceful stimulus later this year will provide a fillip to growth, lifting asset prices.