Passengers stroll along the platform after getting off a train at Chongqing North Railway Station on the first day of the 2025 Spring Festival travel rush on Jan. 14, 2025.
Cheng Xin | Getty Images News | Getty Images
BEIJING — Despite promises of government assistance, China's economy has yet to see the expected turnaround that investors eagerly anticipate.
Even though policymakers have implemented interest rate cuts and announced stimulus plans, specific details on fiscal support are not expected until the annual parliamentary meeting in March. Official GDP figures for 2024 are set to be released on Friday.
"China's current fiscal stimulus is insufficient to tackle the challenges affecting economic growth... We remain cautious about the long-term outlook given China's structural issues," stated BlackRock Investment Institute in a weekly report on Tuesday. The firm, which holds a slightly higher allocation to Chinese stocks, expressed readiness to increase its holdings if the situation changes.
Of immediate concern is the decline in domestic demand and fears of deflation. Consumer prices saw minimal growth in 2024, increasing by just 0.5% after excluding volatile food and energy prices. This marks the slowest increase in a decade, according to data from the Wind Information database.
"Consumer spending is weak, foreign investment is decreasing, and certain industries are facing growth pressures," remarked Yin Yong, the Mayor of Beijing, in an official annual report on Tuesday.
Beijing aims for 2% consumer price inflation in 2025 and is focused on enhancing technological development. While nationwide economic objectives will be revealed in March, senior economic and finance officials have indicated in the past two weeks that fiscal support measures are in progress, with plans to issue ultra-long bonds to boost consumption surpassing last year's levels.
The announced stimulus in China is expected to take effect this year, but the impact may take time to become significant, as per Mi Yang, head of research for north China at JLL, a property consultancy, speaking to reporters in Beijing last week.
Pressure on the commercial property market is predicted to persist this year, with prices potentially declining further before rebounding, added Yang.
Rental rates for high-end office spaces in Beijing (Grade A) dropped by 16% in 2024 and are projected to fall by nearly 15% this year. Some rentals are approaching levels last seen in 2008 or 2009, cited JLL.
New shopping centers in Beijing saw average occupancy rates of 72% upon opening in 2024—traditionally, malls were not opened if occupancy was below 75% or was significantly lower. Within a year, however, these new malls have achieved a 90% occupancy rate, according to JLL.
Home Appliances
Unlike the U.S., which provided cash to consumers during the Covid-19 pandemic, China introduced 150 billion yuan ($20.46 billion) in ultra-long bonds for trade-in subsidies and equipment upgrades in late July. An additional 150 billion yuan was allocated for equipment upgrades.
China has already utilized 81 billion yuan for this year's trade-in program, covering a wide range of home appliances, electric cars, and offering up to a 15% discount on smartphones priced at 6,000 yuan or less.
Consumers who purchase premium phones tend to upgrade and recycle their devices more frequently than those buying lower-end models, suggesting that the government aims to encourage a new segment to shorten their upgrade cycle, according to Rex Chen, CFO of ATRenew, which manages stores for processing smartphones and other secondhand goods.
Chen anticipates that the trade-in subsidies program will increase recycling transaction volumes for eligible products on the platform by at least 10 percentage points, up from the 25% growth seen in 2024. He also expects the government to implement a similar trade-in policy for the next few years.
However, it remains uncertain whether the trade-in program alone can lead to a sustainable recovery in consumer demand.
Nomura's Chief China Economist Ting Lu noted in a report that the sales boost from the program is likely to diminish by the second half of the year, with tepid new home sales limiting demand for home appliances.
Real Estate
The real estate sector, which historically represented over a quarter of China's economy, has faced challenges following government crackdowns on developers' high debt levels in 2020, coupled with the impact of the Covid-19 pandemic.
In September, China pivoted its stance on real estate after a high-level meeting led by President Xi Jinping called for supporting the sector to prevent further decline.
Measures to bolster the sector include expediting construction on sold but unfinished apartments through a whitelist process due to developers' financial constraints. In China, new apartments are typically sold before completion.
Jeremy Zook, lead analyst for China at Fitch Ratings, indicated that the real estate market has yet to hit bottom, suggesting that authorities may provide additional direct support. Zook highlighted the difficulty of transitioning away from real estate for the economy, despite China's intentions to reduce reliance on the sector for growth.
The recent government measures have sparked a rally in the broader stock market and marginally improved sentiment.
Sales of new homes in major Chinese cities have surged by nearly 40% in the past 30 days compared to a year ago, according to analysts at Goldman Sachs. However, they cautioned that high inventory levels in smaller cities indicate that property prices may further decline, and the homebuilding sector is likely to remain subdued for years to come.
In Foshan, a relatively affluent city near Guangzhou in southern China, it could take 20 months to clear housing inventory in one district and seven months in another, as per a 2024 report from the Beike Research Institute. The city witnessed a 16% decline in floor space sales last year, the lowest in a decade.
Geopolitical Concerns
Adding to China's economic challenges are tensions with the U.S. Similar to Washington's export controls, Beijing has prioritized domestic players in strategic sectors like technology to uphold national security.
This approach has led to more European businesses in China opting to localize, despite added costs and reduced efficiency, to retain customers in the country, as highlighted in a report by the EU Chamber of Commerce in China last week.
Chinese officials have underscored the importance of integrating security with development in their official statements.
Part of Beijing's growth support initiatives includes building "security capabilities in key areas," as mentioned by Yang Ping, director of the investment research institute at the National Development and Reform Commission, during a press event on Wednesday.
This year, the focus is on enhancing consumption ahead of improving investment efficiency, Yang stated. She dismissed concerns about the trade-in subsidies' impact fading after an initial rise and hinted at more details following the March parliamentary meeting.
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