For even the most casual China observer, the weakness of the world’s second-largest economy has been striking.
Given the size of China in emerging market indices and its importance as a trading partner, it is not surprising emerging markets have trailed their developed counterparts.
Chinese economic growth is stuck in a rut, but there are positive signs that things are shifting.
China’s recent economic woes stem from a combination of its imploding real estate market that has triggered the failure of some of its largest listed property developers, the reduced levels of consumer activity this has helped to bring about and the renewed geopolitical tensions with the US.
Given the power that the loosening of Covid-19 restrictions was due to unleash in 2023, investors will have been left disappointed and burnt as a result of the changing environment.
However, a recent shift in Chinese government policy has been more supportive and suggests the tide may be turning. Since the summer, we have seen China’s policymakers implement a RMB1tn (c. £112bn) two-year infrastructure spending spree.
This comes on the back of support for the housing sector that includes additional financing for property developers alongside consumer-facing initiatives such as encouraging banks to reduce mortgage refinancing rates.
This is important, as the property sector is a far more significant driver of China’s economy than those elsewhere. Around 44 per cent of China’s household wealth is held in fixed assets (by far the greatest part of which is real-estate holdings). This compares with only around 27 per cent of US household wealth.
These measures could have a substantial impact on sentiment in China as they offer the potential for the real-estate sector, and by extension the consumer, to find their feet once again.
China’s domestic issues are only one facet of the emerging market question, however.
Easing tensions
It is always difficult to get an accurate read on geopolitical currents with meetings held behind closed doors, but Chinese/US tensions appear to be easing as the frequency of high-level talks between the two has grown.
November announcements regarding reduced Chinese fentanyl production, the supply of which has greatly exacerbated the US opioid crisis, and joint statements on military matters also point to a thawing in relations.
The strained relationship had been a major concern for global investors, so improvements here could also boost the market. On the flip side however, as the US presidential election ramps up in earnest, the looming possibility of another Donald Trump-led government could put things back on ice.
Put simply, China cannot be relied upon to do a lot of the heavy lifting for investors turning to emerging markets, as they have perhaps expected in the past.
