This article was written by Ed Yau, fund manager and ESG specialist. It was published in Sphere on September 4, 2024.
Unlike most economies around the world, China has largely missed the recovery wave, as evidenced by the behavior of its consumers, who have been much less inclined to spend recently.
While investors are debating the possibility of a soft landing for the US economy after signs of post-Covid overheating and successive interest rate hikes, the situation on the other side of the Pacific Ocean is markedly different. Unlike many economies globally, China has missed an entire business cycle and is still struggling to regain growth after the late lifting of lockdowns in 2022, which left many sectors in distress. This lack of momentum is reflected in the anemic behavior of Chinese consumers, who seem unwilling to spend, and in the overall gloomy mood of investors. Where have the wealthy tourists who once flocked to luxury stores in Lucerne, Paris or London gone? And when will they regain their dynamic and entrepreneurial spirit?
The current weakness in China’s economy is not confined to discretionary goods, such as cosmetics, although the disappointing recent performances of Sephora and Estée Lauder are telling examples. Other essential sectors, such as healthcare or even consumer staples, are also being impacted by this widespread reduction in spending. Some international brands may attempt to use this economic context to conceal their own loss of competitiveness and market share, but a significant part of the problem remains directly or indirectly linked to the persistent weakness of the Chinese real estate market, which has long been a powerful driver of growth.
Despite a series of measures adopted by the Chinese government, such as interest rate cuts, tax subsidies aimed at stimulating consumption, and efforts to reduce excess housing stocks, the stimulus policies have not yet yielded the expected results. The intensity and effectiveness of these policies, combined with the lack of more pragmatic new initiatives during the Politburo meeting in July, have continued to disappoint since the beginning of the year.
The real economic issue China faces today is a widespread crisis of confidence, both among business leaders, in China and internationally, and among consumers. While exports may have provided some temporary support to GDP growth this year, it is becoming increasingly clear that additional fiscal stimulus measures will be necessary to achieve the annual growth target of around 5%.
The silver lining, so to speak, is that investor expectations regarding economic policy have been so significantly revised downwards that any concrete measure aimed at correcting course could be well received by the markets. It is true that Chinese President Xi, known for his steadfastness, has often been slow to alter course, as was the case with his management of the "zero-COVID" policy. It remains to be seen whether he will also consider a turnaround in terms of stimulus policy, to prevent the economic slowdown from further prolonging in China.
