Challenges facing China’s economy

China’s economy, long seen as a key driver of global growth, has entered a period of significant slowdown. In the third quarter of 2024, the economy expanded by 4.6% year on year, marking the weakest growth in 18 months and falling short of the government’s 5% full-year target.

The latest data underscores the depth of the challenges China is facing, from sluggish consumption to a persistent property slump.

In response, Beijing has ramped up stimulus efforts, including fiscal spending and a new initiative to encourage non-bank financial institutions to invest in the stock market.

This move lifted China’s CSI 300 Index by 3.6%, providing a short-term boost to investor confidence.

That said, the underlying structural issues are far more complex. China is caught in a ‘doom loop’, where cyclical and structural problems reinforce one another.

Growth is declining, deflation is looming, and there is a loss of confidence in the government’s ability to steer the economy.

The once-booming property market is now in freefall, and China’s ageing population is creating demographic headwinds that will be difficult to overcome.

Implications for investors

For global investors, China’s challenges have far-reaching implications. Over the past two decades, China has been a major contributor to global economic growth. From 2010 to 2020, its gross domestic product surged by more than $11 trillion, making it a critical engine for demand.

As China slows, the ripple effects will be felt worldwide, particularly by companies and sectors heavily reliant on Chinese consumption.

Investors exposed to industries like technology, automobiles, and luxury goods will need to reassess their positions as China’s economic outlook darkens.

One of the most concerning aspects of China’s slowdown is the collapse of its property market. Real estate has long been a cornerstone of Chinese household wealth, and as property values decline, so does consumer confidence.

This is leading to reduced spending, which, in turn, drags down the broader economy. Retail sales have shown some signs of improvement, rising by 3.2% in September, but analysts remain cautious. The rebound appears fragile, and without stronger household consumption, the economy remains on shaky ground.

Opportunities

Despite these challenges, there are still opportunities for investors, particularly those who are willing to take on some risk.

China’s government is committed to stabilising the economy through stimulus measures, such as increased government bond issuance and fixed-asset investment.

Industrial production grew by 5.4% in September, exceeding expectations, and infrastructure spending is likely to continue as a key pillar of the recovery.

For investors who can stomach volatility, Chinese government bonds or infrastructure-related stocks may offer attractive returns.

At the same time, some analysts are drawing parallels between China’s current predicament and Japan’s economic struggles in the 1990s. Like Japan, China is facing deflationary pressures, a significant debt overhang, and an ageing population (all factors that contribute to economic stagnation). This is often referred to as ‘Japanification’, suggesting that China could be in for a prolonged period of slow growth unless it implements significant structural reforms.

While short-term stimulus measures may offer temporary relief, long-term economic stability will depend on China’s ability to boost household consumption and private investment.

Bright spot

For investors seeking growth opportunities in China, the technology sector remains a bright spot.

After President Xi Jinping emphasised the importance of technological development in state media, technology stocks surged, with the Hang Seng Tech Index climbing by 5.8%.

China’s long-term commitment to technological advancement, coupled with government support for innovation, makes this sector an appealing option for investors with a long-term view. However, given the volatility of the tech sector, caution is still advised.

Balance is key

In short, China’s economic slowdown presents a mix of risks and opportunities for global investors.

The short-term boost from stimulus measures may create opportunities in areas like infrastructure and technology, but the country’s long-term challenges – particularly in the property sector, and in terms of demographics and debt – suggest that sustained recovery will be difficult.

Investors should approach China with a balanced strategy, carefully weighing the risks while staying open to potential gains in key sectors.

Dr Francois Stofberg is a financial well-being economist at the Efficient Group.