The sharp rally in the Chinese stock market in October had kindled the hope of economic recovery.
However, the buzz was short-lived, and now the Chinese economy faces a bleak outlook in 2025.
The slowdown in domestic consumption and manufacturing, the real estate slump and the return of Donald Trump apparently have put the brakes on economic improvement.
Beijing recently came up with measures to boost equity markets as consumer sentiments have gone downhill, as per JP Morgan.
“Negative wealth effects for Chinese households caused by falling property prices have been compounded by a simultaneous decline in equity markets and falling interest rates on deposits, leading to lower confidence,” it said.
World Bank said the objectives of the stimulus measures remain unclear as China grapples with a property crisis and an ageing population.
“The question is whether [the stimulus] can actually offset consumer concerns about declining salaries, concerns about declining property incomes and fears about falling ill, growing old, becoming unemployed,” said Aaditya Mattoo, East Asia and Pacific chief economist at the World Bank.
And China now is not in the position to support economic recovery through monetary stimulus, said Erik Lueth, global emerging market economist at Legal and General IM.
The recently announced stimulus measures were aimed at stimulating the economy and stabilizing markets. But they failed as Chinese markets fell.
“While government actions have bolstered optimism, analysts caution that the rally is based on “unrealistic expectations” of the impact of government stimulus, and that it may be too soon to make any substantial upgrades to Chinese equities,” said Wright Research.
All major Wall Street analysts have warned of bad days for China in 2025 when the global economy is expected to grow solidly.
World Bank has downgraded the GDP growth for China in 2025 to 4.3 percent. JP Morgan said the harsh regulations in China have negatively impacted the profitability of Chinese companies and stock markets.
“Earnings per share growth has not been able to keep up with economic growth over the last 10 years, while return on equity fell from 15 percent to 11 percent,” it said.
In May 2024, the International Monetary Fund (IMF) upgraded the Chinese economy’s growth forecast for 2025 by 0.4 percentage points even as it warned of risks.
Now the forecast has become negative. IMF’s First Deputy Managing Director Gita Gopinath said the sluggish recovery post-Covid had dented stock market prospects.
“Risks to the outlook are tilted to the downside, including from a greater or longer-than-expected property sector readjustment and increasing fragmentation pressures,” she had said.
Morgan Stanley has downgraded China to slight “underweight” from “equal weight” thanks to concerns over corporate earnings and market valuation.
Goldman Sachs said valuations were not demanding. “The property and retail sectors remain under pressure and the economy may not benefit as much from policy support in China as it previously has, given China’s focus on bolstering the domestic economy,” it said.
Trump has announced to impose of up to 60 percent tariffs on Chinese goods. Chinese economic growth would be cut by 0.7 percent even if 20 percent tariffs are imposed, as per Goldman Sachs.
China must take precautions, said Huang Yiping, a member of the Monetary Policy Committee of the People’s Bank of China and the Hong Kong Stock Exchange’s Mainland China Advisory Group.
“Donald Trump is very likely to further hike tariffs to target China. Beijing should take precautions by rolling out more measures to stabilise and spur domestic demand,” he said.
Global investors are apprehensive of the huge negative impact on the Chinese stock market that a Trump decision can make. Rong Ren Goh, a portfolio manager at Eastspring Investments said foreign investors may position themselves defensively on any China-related assets.
“Right now, the markets are focusing narrowly on the prospect of tariffs because it is the easiest lever to pull directly under a presidential executive order, but we’ve seen between 2016-20 other levers that can be pulled to contain China,” he said.
The Trump effect was brightly demonstrated after Chinese markets reacted sharply to the US election outcome.
And China now is not in the position to support economic recovery through monetary stimulus, said Erik Lueth, global emerging market economist at Legal and General IM.
“We are in a typical liquidity trap and we don’t think that, at the stage where we are, this will do the trick,” he said.
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