China Insights – economy in transition
Key Highlights:
- Recent macro data points to a patchy and uneven recovery as uncertainty about the property outlook, subdued consumer confidence and overcapacity in some sectors took hold
- Underlying inflation is likely to stay low amid this domestic supply–demand imbalance, though policy easing helps tackle deflation risks
- Sustainability of China’s export momentum faces risks from any significant change in global demand or increase in trade tensions
- We believe forceful policy actions are needed to restore confidence and fundamentally reflate the economy. achieving high-quality and sustainable growth will require a wide range of structural reforms to address underlying imbalances and unlock productivity gains
- Economic transition creates opportunities in sectors prioritised for long-term development
An uneven cyclical recovery amid economic transition
Recent data points to a patchy and uneven recovery amid the ongoing property downturn and subdued domestic confidence, despite strong growth in new economy sectors. The divergent growth paths across sectors also reflect structural adjustments and policy priorities amid an ongoing economic transition. Policymakers have stepped up actions to support the property sector and further measures are likely, yet uncertainty about the property outlook remains.
Overcapacity concerns and the inflation outlook
Overcapacity and fierce competition have led to lower profitability in some sectors. Policymakers have called for industry self-discipline to reduce inefficient production capacity and prevent excessive competition. Underlying inflation is likely to stay low amid this domestic supply–demand imbalance, despite policy easing.
China’s exports face geopolitical and global-demand risks
Chinese exporters have continued to expand their global market share ex-US and have diversified into the Global South, mitigating some of the potential drags from US tariffs and tech restrictions. Whilst the US and the European Union have recently announced additional tariffs on selected goods, the immediate impact is likely to be limited. However, any significant change in global demand or increase in trade tensions would pose downside risks to the outlook for 2025 and beyond.
Policy easing expected but structural reforms required
We expect more targeted and piecemeal countercyclical policy easing to support domestic demand and tackle financial-stability risks. Policy implementation is key to the outlook. China’s economic transition will take time, and achieving high-quality and sustainable growth will require a wide range of structural reforms to tackle headwinds and address underlying imbalances.