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China Perspectives series is a monthly discussion on the latest credit market and economic developments from China with experts from both within and outside of Fitch Ratings.
Welcome to China Perspectives, a podcast on economic and credit developments in China, featuring experts from within and outside of Fitch Ratings. My name is Jeremy Zuk, lead China sovereign analyst at Fitch Ratings and cohost of this podcast. In today's episode, we'll discuss some of the key issues and policy themes that are likely to drive China's macro outlook in 2025. 2025 is likely to be a year of high uncertainty for China's economy, So there are quite a lot of interesting issues to discuss, ranging from trade tensions to domestic demand prospects to the potential government policy measures. To help us parse through some of these uncertainties, we are privileged to have with us today Ginny Yan, the chief China economist at ICBC Standard Bank.
Speaker 1:In her role, Ginny leads the China market strategy and research team, so we're looking forward to hearing her perspectives on China's outlook. Thank Thank you for joining us today, Ginny.
Speaker 2:Thank you very much for having me, Jeremy.
Speaker 1:Given that we're in the midst of outlook season, I wanted to start with a broad question on your assessment of China's economy over the next year, and what are the key macro issues that you'll be watching for in 2025?
Speaker 2:I think it's a in very interesting time, to look at China, particularly as China starts to look at not only growth, but the focus is shifting towards stabilizing growth whilst transitioning towards the next growth model and development model. So the focus from my perspective is really about derisking the economy before nurturing those new growth cylinders. So growth engines of innovative, creative industries once focused at technology. But to do that and really unlock the investment necessary, both from a government level but also from a private level, we do need to have plenty of tools in place to derisk the economy. And what we're seeing from policy in 2024 already is a lot of fiscal resource in particular earmarked to derisk the economy in the upcoming year.
Speaker 2:But, certainly, the outlook for 2025 is very much that we will perhaps look forward to more proactive stimulus policies, in the coming weeks and months.
Speaker 1:Yeah. Thanks. And we'll certainly touch on a lot of those fiscal policy measures that you anticipate in 2025. But first, you know, I wanted to touch on what will likely be one of the bigger issues for China's economy next year, which is the potential escalation of The US China trade war given the return of president Trump to the White House. There's obviously still a lot of uncertainty around the actual implementation of Trump's trade plans, but, you know, he stated his desire to put up to 60% tariffs on on Chinese imports.
Speaker 1:So how do you see the base case for US China trade frictions in next year? And, you know, the big question is, of course, are these threats real, or are they simply a a negotiating tactic?
Speaker 2:So I use the term derisk, and I think this goes for both domestic and external policies. And frankly, this is a new normal. I think in the last Trump presidency, we also talked about the same thing. The two largest economies in the world are going to have to learn to live together. And both are in a position to work coordinated to ensure that what needs to result in the world today at least moves in the right direction.
Speaker 2:But clearly, both economies are at different stages of the economic cycle, and China is heading towards development model that's very different to to where The US is today. So there will be differences, but the key is to agree to disagree and to increase the engagement. So I think there will be friction, and we're already seeing, you know, this in the format of the threat of tariffs, you know, the threat of withdrawing some of the existing, you know, connections. But this in the direction for connectivity is still very much that the two economies still coexist and need one another. If we are to nurture growth and the world needs positive growth, certainly in this environment, where geopolitics is accentuating the volatility in markets, The US and China do need to work out which exactly, you know, which sectors they are allowed to work together.
Speaker 2:So, yes, clearly, areas such as semiconductors and other areas of technology and maybe national security areas, there will be sensitivities. So there will be, you know, definitive definitions around ring fencing, which sectors both economies would like to impose more protections on. But also, at the same time, there will be areas that will be thriving because both economies are encouraging more coordinated efforts. In particular, I'm sure the world is looking forward to more collaboration around climate change, financing on sustainable growth. And, also, of course, we know there's a lot of capital that both economies can use to deploy around the world, not just in mutual economies, but across the world in third party countries.
Speaker 2:So, yes, tariffs upon us, and perhaps a little bit of tit for tat, which we have seen before. You know what? This is the second time around, and I think both China and US have learnt, and those who are behind the scenes have really also learnt from last round of the, you know, the coordination and cooperation between the two economies. So, yes, I think sentiment will very much be volatile around any tit for tat type of rhetoric. However, I think markets have learned also that in reality, the two economies, particularly businesses involved in the investment growth and particularly consumer sectors, services sectors, will continue to collaborate going forwards.
Speaker 1:Yeah. Thanks for that perspective. I wanna dig into a bit on derisking that you mentioned. So as you say, this is the second time around Trump had been in office before, and China has seen this playbook previously. And so over the past several years, you know, China has done quite a lot to try to enhance its resiliency to these types of trade shocks, either through, you know, developing their own domestic supply chains, diversifying their international supply chain.
Speaker 1:How do you assess the progress that China has made, and is their economy more resilient to this escalation and tariffs this time around?
Speaker 2:So my first d was derisk. The second d I wanted to introduce is diversification, and I'm sure this is very familiar territories for most, you know, involved in financial services, particularly assets management. The theme of around asset allocation diversification has been around for a while, and it's even more pertinent now to look at diversification. So China has been diversifying its trade partners. That's very clear.
Speaker 2:In terms of trade partners, its now, you know, biggest trading partner is ASEAN as a trading block rather than the European Union. So we know that, and we know that, essentially, the neighboring countries around China has received the predominant amount of trades and also investment flows and also maybe people flows as well. There's not great data around that, but certainly, there's a huge amount of human capital, you know, mobility between China and neighboring countries. But China has gone even further afield. So the South South Trade Corridor has been really burgeoning, and this is the reason why we look at IMF projections.
Speaker 2:We see that those economies who benefit on the back of this South South Trade Corridor will stand to gain from positive growth, particularly those with positive population growth. We know from a structural perspective, China is facing a severely aging population and, in fact, many of the more mature Asian economies. Aging population means a loss of productivity, particularly those who are intensified or dependent on labor productivity. So this is why sectors such as AI, robotics are receiving a lot of focus and interest right now in investments and tracking FTI investment is that for these economies, we do need to see, you know, that start to offset that aging population loss in productivity. So going back to diversification, China has really diversified its reach across the world.
Speaker 2:So rather than relying on several economies, so not only just for the Western economies when it comes to selling its products to these consumer led economies such as The US, Europe, it's also diversifying its supply chains to really attract a whole host of the connectivity across the supply chain. So not only selling goods to other countries, but also producing goods and also receiving goods from other countries. We know China is the biggest consumer of raw commodities, but China is now, also reprocessing some of these raw material in order to produce more higher value added products in order to export to other nations. So this is key. The supply chain intensification or added value from China is what's going to shape China's trade and also ongoing investment going forward.
Speaker 2:So diversification has happened globally across Central Asia, Latin America, Africa. And, of course, these are the economies that will benefit from positive growth on the back of fairly useful populations, but also, you know, the ones that will, you know, attract a lot of, FTI, foreign direct investment, and interest will be the one that potentially will have stable governments, obviously, relatively healthy balance sheets. So I think China's interaction with these other emerging economies, not just the ones that they used to import raw materials from, but a whole host of others that are key and essential for this longer and more sophisticated supply chain will stand to benefit in the years to come.
Speaker 1:Very interesting thing to to keep an eye on. I wanna turn to the domestic economy now. You know, as you mentioned, China's economy is kind of in the midst of a transition. A big part of that transition is is moving away from really property sector driven growth towards what the government sees as higher quality growth drivers. And so the property correction has really been behind, you know, some of the challenges that we've seen in China's domestic economy over over the past couple years.
Speaker 1:To start, I just wanted to get your perspective on the property sector. What do you expect in 2025? Are are we kind of near, or are we at the trough in terms of this property correction?
Speaker 2:I certainly hope we're at the in near or at the bottom of this property cycle, but depends on what you mean by bottom because, obviously, we're talking about prices here, transactions, or we're talking about maybe fixed asset investments related to properties. So the latter, if we're talking about the fixed asset investment related to the construction sector or the property sector, we are still seeing double digit negative growth. And what that means is that aggregate fixed asset investment is not able to become a positive contributor to GDP unless there is enough other fixed asset investment that can offset the downturn in the property sector related investments. So so far, when we look at the distribution or the contribution to GDP growth at 5% target, What we need to see is both investment and consumption picking up the slack. Very interestingly, this year, the top contributor in the latest quarter q three GDP was actually net exports.
Speaker 2:That hasn't happened for a very long time. A lot of that is illusion and probably temporary as we know. Faced with tariffs, a lot of exporters are actually trying to export the volumes ahead of the expected tariffs kick in. So a lot of front loading is happening. And what that means is that, you know, some of that exports start to slow into 2025.
Speaker 2:A lot of that would have been reflected in the twenty twenty four q four number already. So when it comes to the property sector, if we're talking about the end of the negative growth in fixed asset investments related to property sector, I think we're still quite far away given that we're still seeing double digit negative growth in fixed asset investment properties. However, we're talking about prices and maybe transactions. Now there's a slightly better story there. Since we had some of the policies from September onwards, particularly in lots of major cities, and really there, I'm talking about relaxation in terms of property buying purchases, you know, loosening of mortgage rates, and, of course, down payments, percentage put on down payments.
Speaker 2:And, of course, we always talk about China as if it was a continent because, obviously, each city has its own policies. You know? So there's a lot of differentiated policies when it comes to property sector. So the tier one big cities really haven't seen that much of price fall, and probably we will see a flattish price movement heading into 2025, but we are not going to see really the reactment of a of a heated property sector or a bubbly property sector as long as the focus remains in really a discouraging speculative buying. So a lot of policy is really focused at discouraging second home ownership, speculative property purchases, and really to incentivize the digesting of existing inventories so that we don't have empty properties or properties that have not been built or projects sitting there and construction hasn't kicked off because there's missing, you know, liquidity, particularly, facing debt situations in property developers.
Speaker 2:So the first stage was, to derisk, property developers' balance sheets. Once that's happened, and particularly local governments, also derisking their balance sheet because local governments have been reliant on land sales as a a source of revenue, and also lots of, local government investment vehicles sprung up post financial crisis were really using land as collateral to extend debt by borrowing from banks. So that really was the the old days. We're not seeing that anymore. And in fact, we haven't seen particularly high demand for bank lending, and then, actually, it's the opposite.
Speaker 2:Policymakers are trying to encourage more, you know, corporates to borrow from banks. There's simply not enough demand for credit. And the reason being is sentiment. There is lack of confidence to invest for the future, whether it's local governments, whether it's corporates, whether it's, you know, households. So in fact, when it comes to property sector, obviously, it's important to offset that, but it's so crucial because it's almost a trigger for confidence and sentiment, and it's a barometer to see whether we will have a return and recovery of sentiment and confidence in the real economy.
Speaker 2:If house prices, if transactions continue to grow positively or have a turnaround in its current negative sentiment stage, we will likely see wealth effect boost also consumption and households and corporates becoming more and more positive about the future outlook.
Speaker 1:Related to this idea of, you know, somewhat subdued domestic demand is the deflationary pressures that China's economy has been grappling with. What's your view on the inflation outlook for 2025? What will these deflationary pressures persist for China?
Speaker 2:Well, for me, deflation is less about maybe, you know, we're heading into deflation territories because, actually, we've seen bouts of deflationary pressure in the economy. But if you look at the core inflation, so removing energy, food costs, etcetera, what we're seeing is a relatively muted inflation, sometimes positive and actually mostly just hovering above zero. So what that's telling us is still very much a lack of demand. So it further evidence that more needs to be done to stimulate the demand side of economy. So, personally, I'm not worried about deflationary risks going forward, particularly as, you know, what normally slurs up China's inflation is food supply side shocks.
Speaker 2:So pork cycles, other food related shocks. Those are fairly under control right now. Weather conditions obviously exist, but certainly, you know, when it comes to pork prices, which still very much is a, you know, predominant part of that food basket, heading into Chinese New Year, we're not seeing, you know, expectations for those to shock prices. What we're really talking about here when it comes to deflation is the general outlook for commodity prices and the outlook for demand. So heading into 2025, assuming that there will be continued stimulus or particularly efforts to help demand stabilize, I would expect that coinflation to return, but obviously remaining fairly moderate to mutual, which means that for monetary policymaking, inflation, either inflation or deflation, will probably be not a key consideration.
Speaker 2:But the threat of deflation is certainly on people's minds, especially as deflation also discourages consumers to spend because if prices are going to be even lower next day, why would I purchase now? So if you go to China, if you visited China, you'll see that a lot of price cutting discounting is happening. And that obviously feeds into, you know, the lack of inflation. So the outlook for inflation or deflation is actually even more important than the current situation in terms of inflation. So I would expect that if we continue to have a more demand side policies to reinvigorate demand and to boost consumption and prices are simply not being cut, you know, frequently, we may see, you know, the healthy return of that core inflation.
Speaker 1:Picking up on that idea of policy response for next year. So investors have been pinning a lot of hope on significant stimulus coming from the government. So to start, I wanna get your views, and Hallettboro, the other week, made a announcement that they plan to shift monetary policy to a moderately loose stance from its current prudent stance, and that they also plan to implement a a more proactive fiscal policy. What
Speaker 2:do
Speaker 1:you believe that the shift in language signals for the government's policy response going into 2025?
Speaker 2:So the market reacted quite significantly on the back of that language change because it was unexpected. I think many expected the language to stay the same. So since between 2011 and 2024, really, that prudence in monetary policymaking has been, you know, the really common language in that readout. So what this tells us is that we're going back to almost the post global financial crisis, stage of really trying to use moderate and, you know, loose monetary policy to stimulate growth. So this is why markets were so excited about what's to come.
Speaker 2:Now the reality is that, actually, markets were already expecting rate cuts. So it's now really all about the timing of those rate cuts and which rates exactly are going to be cut. So the difference between now and maybe 02/2010 when that language of moderately loose language was used from, for monetary policy is that the interest rate corridor looks so much different now compared to before. The PBAC has done a lot of reform when it comes to creating this more market determined interest rate corridor. So we now have the MLF, LPR.
Speaker 2:Obviously, they're acronyms. I'm not sure. Readers will be able to look into what what those represent. I won't have time to to go too much into details on those. But, certainly, shorter tenor rates are now becoming the more benchmarks for mortgage rates, for lending, and of course, the central banks has done a lot of open market operations.
Speaker 2:So really using those shorter tenet rates to lead the market and interbank market expectations on rates. So I would expect that although language is going back to the 02/2010 mentality, but in actual fact, the implementation may look a lot different. Rather than just cutting the triple r, reserve requirement ratio, or the benchmark deposits or lending, what we may see is more dynamic and, more innovative ideas around using different policy instruments at different times. The key is the interaction around channeling that liquidity towards the real economy. What's missing right now is that transmission mechanism between the interbank and the real economy.
Speaker 2:There's no lack of liquidity or capital. We know there's plenty of liquidity sloshing around the financial sector. That liquidity needs to go towards where it's most needed, and that is to household balance sheets, corporates, and to replenish particularly the local government's balance sheets so that we can kick start investment and consumption.
Speaker 1:I wanna turn to the fiscal policy aspect of the policy response as well. You touched on this earlier. Given the the recent fiscal announcements from November related to managing hidden local government debt risks through debt swaps, you mentioned this around the the process of derisking. How do you see the effectiveness of that policy? And then secondly, in 2025, do you anticipate that there will be another fiscal push and one that, you know, investors, they they keep talking about the need for a consumption driven fiscal approach?
Speaker 1:What's your views on sort of plans for 2025?
Speaker 2:So I've introduced two of my d's, which is derisking and diversification. Now I want to introduce a third d. So there are only three. Sorry. I'm not gonna go on with my d's, but certainly, the third is domestic.
Speaker 2:So domestic capacity. We were introduced to the terminology of dual circulation. Now in 2025, I think that the domestic side of that dual circulation is becoming even more important, and that is really to really reap the full potential of domestic capacity. So domestic consumption really is dependent on how much fiscal stimulus or fiscal triggers can be unlocked on the back of derisking local government balance sheets. So you talked about the debt swap.
Speaker 2:So, you know, Beijing approved a one off 6,000,000,000,000 RMB debt swap quota, but that is over 2025 to 02/1927. And on top of that, there's also a 4,000,000,000,000 allowance in annual special bond quotas between 2025 to 2029. Now 2025 is important not just that the fiscal announcements will be used up in this one year, but as the final year of the fourteenth five year plan, a lot of the promises that was made at the beginning of this current five year plan really needs to be completed or at least looking like it's going to be completed by the 2025. So a lot of efforts will be around, you know, this multiyear fiscal package. What is the roadmap towards making sure those quotas, so both the debt swap plus the annual special bond quotas over the period of five years.
Speaker 2:And in total, that's a 12,000,000,000,000 debt resolution over five years. So heading into the fifteenth five year plan, that 12,000,000,000,000 will need to translate into more investment and more GDP growth. So this is why we firmly believe that 5% GDP target will probably stay in place for the foreseeable few years to really ensure that the fifteenth five year kicks off with the right, you know, beginning and a lot of fiscal impetus to ensure there's plenty of fiscal resources that can be allocated not just by central governments, but by local governments. There's a a lot of talk around, you know, empowering local governments to invest more and to really implement policies that is tailored around the needs of each province. We can't have a blanket policy across the nation when each province is essentially a micro growth model.
Speaker 2:Some provinces are reliant on a certain production or certain parts of the supply chain. Others are probably more consumption led. The wealth of each of these provinces also look very different. The increase in disposable incomes needs to be targeted at roughly around the same as real GDP growth, and in which case, several provinces will need more help than others. So all in all, when we look at this, you know, aggregate fiscal package, it doesn't look like, you know, a nominal amount earmarked to certain projects.
Speaker 2:It actually is the start of a multiplier effect to kick start investment and consumption in the coming five years.
Speaker 1:To end, I thought it would be good to get your views on China's domestic government bond market. So as you say, fiscal policy may be a bit more proactive in the coming years. Chinese government bonds have been rallying in recent months with yields trending even lower. What factors do you think will be driving the trends in government bond market over the next year?
Speaker 2:So China's government bond market and equity markets actually are now long among some of the biggest in terms of, total volume and total size compared to many mature economies. And, certainly, that size will grow. What's different, though, about China's bond, market compared to others is the fact that foreigners are still accessing very little of it. So compared to other large liquid economies such as, say, India and maybe Brazil, what we see that's different in China is that, the yield is very low. So the yield and particularly the negative spread to US treasuries, that has been a theme over the the last few years has really been what's driving foreign investor action around the purchases of Chinese government bonds.
Speaker 2:Now what we do need to see, however, is also a structural shift. I mentioned diversification in terms of asset allocation. Now those who are participating in China's government bond market are not only your asset managers, so portfolio managers, etcetera, foreigners, also foreign sovereign, you know, institutions, particularly central banks, have been increasingly accessing China's government bonds market. Now with different access programs, in particular, bond connects, etcetera, more and more work has been done to make the Chinese government bond market more accessible. But you're right.
Speaker 2:In terms of the market valuation, whether it's a yield performance or whether it's the relative value of CGBs, Chinese government more bonds compared to other emerging markets. Obviously, steel is a key factor why foreign investors perhaps are still less interested in Chinese government bonds compared to other emerging markets. However, I do see with increased geopolitical tensions, increasing market volatility, CGBs and actually the currency, CMY, both offshore and also onshore, CNH and CNY, is becoming increasingly important pair to look at. So dollar CNY or dollar CNY and CGBs is becoming more and more increasingly a focus for investors as a hedge against volatility. So really becoming more of a safe haven assets to have.
Speaker 2:So RMB denominated assets, really, because it of its lack of correlation with the moves in global FX and bond markets, the allocation into RMB denominated assets is almost becoming, you know, a play on diversification and also a safe haven. A little bit like gold, how the gold is behaving right now. The valuation of the gold, as we all know, has been really increasing, and that is on the back of increasing uncertainty in global markets. So there is this longer term structural shift, so more investors looking at CGBs, but we know domestically because of the expectations on even lower yield, in particularly the near term, we will potentially see allocation of bond markets out of CGBs in certain tenors, particularly longer tenors, favoring probably the shorter tenors. So the yield curve profile will look a little bit different heading into 2025.
Speaker 2:Particularly, there is still a little bit of unknown when it comes to exactly what policies will be enacted heading into 2025. The direction of more stimulus to come is fairly well known, but exactly what policies is still in store for markets heading into the Chinese New Year holidays, the performance of consumption over the Chinese New Year holiday period, all of those are still unknown. So markets will still very much shift, and, of course, we may see further rate cut before year end, before Chinese New Year holidays, and that will also have an impact on CGB movements too. But the supply of CGBs or excessive supply of bond issuances, both by central and local governments, will probably ensure that, you know, the excess of supply will keep that bond yield fairly low in the upcoming medium to short term.
Speaker 1:Well, thank you very much for your time today, Ginny, and for sharing your insights on a wide range of topics on what to expect for China's economy in 2025. Certainly, no no shortage of issues to think about over the next year, and we'll be sure to keep in mind your three d's as we do our own analysis of China's economy. Fitch has recently published our own global economic outlook and Greater China sovereign outlook research over the past few weeks. So I would encourage all of our listeners to take a look at these pieces as well to find Fitch's own views on the outlook for China's economy and the key factors we'll be monitoring for the sovereign rating in 2025. You've been listening to Fitch Ratings China Perspectives podcast.
Speaker 1:We wish all of you a happy and healthy 2025. To learn more about our ratings and research on China, visit bittratings.com. Please subscribe to our China Perspectives podcast on iTunes, Spotify, or wherever you get your podcast.