It’s often claimed that China’s leaders take a long view, unlike the short-term thinking that prevails in Western economies. Looking at the markets, we might doubt how well that’s working. Late last month, the government abruptly unveiled a series of schemes aimed at supporting consumption and housing, bailing out indebted local governments and banks, and boosting stocks. The CSI 300 index rallied 32% in two weeks, then fell 7% – the biggest one-day drop since 2020 – when some details didn’t meet expectations.
Pessimists may see this as part of a pattern that’s been evident in China over the last few years: exceedingly rapid pivots that keep wrong-footing markets and leave them struggling for long-term direction. Take, for example, the sudden reopening from zero-Covid policies in early 2023, after giving every sign that progress would be very slow. Or the abrupt crackdowns on various sectors from education (virtually overnight) to tech (more telegraphed, but also longer and more severe than expected) to property (understandable and overdue, but the full consequences seemingly weren’t appreciated). In general, the consistency of policymaking has become much worse over the past few years. It’s worth keeping that in mind when considering whether this is a turning point.
Will structural reforms fix China's consumption?
Let’s start from the widely acknowledged position that consumption is too weak in China. The government can try to boost short-term growth. It can even target this carefully: by handing out stimulus payments as vouchers, money will flow to local restaurants or Chinese-made white goods, rather than European luxury goods. There is also a strong case for the central government to use its balance sheet to back more fiscal spending. One long-standing problem is that Beijing expects cash-strapped local governments to shoulder the burden. Local governments typically depend on selling land for property development for much of their revenue and are thus exceptionally poorly placed to respond in a property downturn.
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Yet until China fixes the structural problems that keep consumption as a relatively low share of the economy, this can only amount to a short-term boost. While that may well be helpful to get the economy out of its current slump, it would be even more encouraging to see faster progress on difficult issues such as the hukou system (household residency permits, which worsen the gap between the wealth of urban and rural residents), social security and land rights, all of which could unlock more consumption from poorer households.
On the plus side, Chinese stocks still do not look expensive. The MSCI China index – mostly stocks listed in Hong Kong – is on a p/e of 11, although the MSCI China A – Shanghai and Shenzhen-listed shares – is a bit higher at 13.5. If growth picks up, this rally could run, even without reforms. There are plenty of cheap tracker funds to follow it, while trusts such as Fidelity China Special Situations (LSE: FCSS), JPMorgan China Growth and Income (LSE: JCGI) and the tech-focused Baillie Gifford China Growth (LSE: BGCG) are on discounts of 10%-15%.
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