The Year of the Dragon, according to Chinese tradition, is associated with good luck, accomplishment and strength. As many investors in the region prepare to celebrate the Lunar New Year and hope for a better year for markets, Fidelity International examines the investment outlook for China in the year ahead.
Following its initial reopening in 2023, China’s domestic sentiment is stabilising at low levels, says Fidelity, “As pent-up demand in consumption and services gradually unleashes, China’s economy is normalising and rebalancing.”
While some sectors — like real estate — face ongoing structural headwinds, there has been a stronger policy response to offset some of the downside risks, says Fidelity.
In 2024, Fidelity believes China will continue its cyclical rebound while its structural shift continues.
Liu Peiqian, Asia Economist at Fidelity International, says their base case this year is that China will experience a phase of “controlled stabilisation”, with “relatively stable” GDP growth, at between 4%-5%.
“While [China] continues to address and resolve long term structural challenges, we do not expect deflation as the cyclical recovery gains momentum, and inflationary pressure will likely remain moderate with headline CPI well below the government’s outlook of 3%.”
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In addition, Liu thinks policy momentum will continue to pick up gradually in 2024 and fiscal easing will do the heavy lifting in stimulating domestic demand.
Changing growth patterns
Fidelity’s proprietary domestic activity tracker has shown a picture of “dual-track” growth dynamics in China following the end of the pandemic.
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Services and industrial growth have taken the lead, while the property sector has been a drag on growth, claims Fidelity. “This reflects the government’s concerted effort to focus on ‘high-quality growth’ instead of achieving numerical growth targets at any cost.”
Liu expects to see a broadening of services consumption rather than the goods-driven consumption of the old economic model. “The tourism and services rebound have been the bright spots in the past few quarters.”
Growth rate may normalise this year as low base effects fade, but Fidelity expects consumption — especially services consumption — to emerge as one of the key growth drivers in coming years.
As an example, Macau’s gaming sector saw “strong recovery” in 2023, with gross gaming revenue reaching MOP19 billion ($3.16 billion) by December 2023. “[This is] not far off the pre-pandemic level of MOP23 billion,” says Liu.
Beneath the moderate stabilisation of fixed assets investment growth, Fidelity has observed a “divergent trend” between manufacturing and real estate investment. “Manufacturing investments have remained robust while real estate investments have been slow,” notes Liu.
“Policymakers have shifted priorities from urbanisation-related investments that were largely dominated by property and infrastructure in the early 2000s, including residential buildings, logistics hubs, road, railway and bridges,” Liu adds. “The new focus aims at efficiently utilising the existing infrastructure to facilitate manufacture upgrade and the building of new infrastructure, such as 5G networks, EV charging facilities and innovation hubs.”
According to Liu, these new forms of investment will foster more sustainable growth as China enters the next phase of development, leading more households to middle- and high-income classes.
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Within trade, exports face more headwinds from lukewarm global demand against a backdrop of structural change over the pandemic, says Liu. “One notable change in export is the value chain upgrade, with China emerging as the top exporter of cars, overtaking Germany, Japan, South Korea and the US. At the same time, imports have moderately recovered as domestic demand improved with the support of policy stimulus.”
Engines of the next phase of growth
After a number of notable policy updates in recent month, which were kickstarted by the Politburo meeting in July 2023, Fidelity expects policy momentum to gradually pick up in 2024.
As China’s economy transitions, policymakers have pivoted to nurture new engines of growth, including focusing on green investments, high-end manufacturing and the digital economy, says Liu. “We expect more resources to be deployed into these sectors, contributing to positive long-term growth and partially offsetting some shorter-term structural headwinds.”
The Chinese government has pledged a concerted policy effort to build a “Beautiful China”, which includes the adoption of a low-carbon development model to reduce pollution and pave the way for its long-term carbon neutrality goal.
One beneficiary of this is China’s electric vehicles (EV) market, says Liu, as policymakers have pledged to achieve 45% of EV adoption in newly-purchased vehicles in China by 2027, with accompanying measures to support the transition.
China is also in transition on the consumption front, and Liu sees “areas of opportunity” here.
China’s population is ageing, and those aged 60 years and older are expected to reach close to 300 million, or over 20% of total population, by the mid-2020s.
Policymakers have rolled out initiatives to support the silver economy. This presents a sizable potential for the economy, says Liu.
The policy support includes better infrastructure and facilities, healthcare services, and social and welfare benefits. China’s silver generation’s consumption is estimated to reach RMB19 trillion ($3.62 trillion) by 2030, which is equivalent to 28% of total consumption and 9.6% of total GDP.
“As the economy gradually recovers, we expect wage growth to improve alongside an improvement in private sector confidence,” says Liu. “Before further strategic guidance is revealed, it is important for investors to remain tactically constructive and nimble. The long-term investment case for China, however, remains intact.”
