China Hits a Speed Bump. Could the Road Ahead Feature More Stimulus?

Executive summary:

  • Soft consumer confidence and property-market woes are playing a large role in the slowdown of China’s economy.
  • We believe that recently unveiled measures to support the housing market are likely to only have modest effects on bolstering economic growth.
  • We don't think the situation has yet reached the point where the Chinese government will be forced to step in and provide more meaningful stimulus. In order for this to occur, we believe a little more slowing in the economy and softening in the labor market is necessary.

After a sharp reopening in the first quarter, the challenges of the Chinese economy have reasserted themselves, causing numerous economists to downgrade their expectations for the country’s economy growth. Numerous media publications have also chimed in on the matter as well.

We think that downside risks have opened relative to our 5% GDP (gross domestic product) expectation, and believe that the current approach of small, targeted stimulus is not enough to change the situation. However, we do feel that some of the recent measures on the property market could prove supportive.

China’s economy falls short of economists’ expectations

Before digging into the challenges that China is facing, let’s take a temperature check of where its economy is. In short, China has been surprising to the downside since June of this year, as evidenced by the Citi Economic Surprise Index chart. This chart shows how economic data has come in relative to economists’ expectations. A negative number means that the data has been softer than expected, and vice versa. As shown, the magnitude of the surprise for China this time around has recently been in lines with previous shocks to the economy, including 2014 and 2015. Note that the COVID-19 experience is not a useful comparison given the scale of the shock that was experienced.

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