The second reason for the lack of an old-school infrastructure-based stimulus may be the government’s desire to shift the economy away from construction and low-end manufacturing to the “new economy,” focusing on Electric Vehicles (EVs), renewable energy, and chips. Since 2016, the Chinese EV industry has received massive government support, including tax breaks, production subsidies, cheap land, loans or grants, R&D assistance, and government bulk purchases. The stimulus continues in 2023, with a recent extension of the EV tax cut until 2027. The significant support has boosted Chinese EV production and global competitiveness. The auto industry’s y/y production has far exceeded the overall y/y industrial production this year. The progress in the “new economy” sector has been a bright spot in the Chinese economic outlook, however it remains to be seen if it will be sufficient to pull the Chinese economy out of its current slump.
The uncertain outlook
The economic outlook for China remains uncertain and could surprise on the upside as well as the downside. As most central banks are reaching their peak interest rate, a soft landing in the U.S. along with resilient demand from Europe and Japan could stimulate external demand in China. Low inflation in China could result in lower international prices meaning that global central banks may not have to hold their rates high for long – providing a further boost to external demand. The government in China has significant fiscal policy room – at least at the central government level – so if the economy continues to falter, the authorities could provide further stimulus restoring domestic and international confidence.
On the downside, the geopolitical considerations could take precedence and the government may be willing to withstand more economic pain to stamp its control. Further decoupling from China could lead to lower external demand pushing the economy into a recession. The progress in the “new economy” could be hampered by regulatory actions such as the EU’s probe into China’s EV subsidies.
During the current economic slowdown, the Chinese government has chosen to implement limited and targeted stimulus measures, rather than the large-scale stimulus typically seen during previous economic downturns. This approach is due to a variety of economic and political factors. The impact of these stimulus measures has been mixed. While there have been recent signs of stabilization and bright spots such as the EV industry, significant longer-term challenges remain. Therefore, we maintain a cautious stance on China. Overall, we are cautious on equity, carrying a slight underweight relative to our benchmark, but remain neutral on EM due to the stronger performances of other Emerging Market countries.
The CSI 300 is a capitalization-weighted stock market index designed to replicate the performance of the top 300 stocks traded on the Shanghai Stock Exchange and the Shenzhen Stock Exchange.