China stock market outlook 2024: is the dragon stirring again?

There is an old joke that if you put the same question to 12 economists, you would get 13 different answers. That joke has taken on a new relevance as regards the economic situation in China, where every expert seems to think they know what is going on but no one can agree on what is actually happening.

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China is always a difficult country to comment on, since its data is opaque and the official figures are not particularly reliable. But it is the second-biggest economy in the world and its performance has considerable influence on the prosperity of the whole Asia-Pacific region, so it cannot be entirely ignored.

So, is the dragon stirring again? After a few years in the doldrums, China is showing signs of getting on the move again.

One problem with judging China’s performance is a widespread suspicion of official figures, which often have overestimated reality as middle-ranking party cadres tell higher-ranking officials what they want to know. This time, however, official figures may have underestimated the performance of Chinese manufacturing towards the end of 2023.

The latest figures from China’s official purchasing managers’ index, which is based on larger state-owned companies, suggest a contraction in manufacturing and non-manufacturing. However, the independent Caixin/S&P index rose to a three-month high of 50.7 in November, the third month in the past four to indicate expansion. Any figure above 50 indicates growth.

There appears to be a sustained rise in new orders that augurs well for the new year. However, many experts are sceptical. They believe more economic stimuli are needed to sustain economy growth in China in the short term.

Credit ratings agency Moody’s is not convinced. It has caused a stir, not least in Beijing, by downgrading to negative its outlook for the Chinese economy for the first time since 2017.

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Moody’s is concerned that a package of measures introduced to stimulate the economy are putting China’s “fiscal, economic and institutional strength” at risk. For the moment, the agency still rates the country’s debt as investment grade, but that will almost certainly be rescinded if there are further stimulus measures, as some experts think may be necessary.

At the heart of this issue is the collapse of China’s property market which has thrown major developers into chaos. Evergrande, for example, has just been given until the end of January to restructure its $300 billion debts after a winding up petition was presented in Hong Kong.

Just across what used to be the border in British colonial days, Shenzhen, China’s main industrial hub, has also unveiled new home-buying measures to further support the critical market. The big fear is that such measures are throwing good money after bad into a bottomless pit.

China grew into the world’s second-largest economy by ramping up exports that fuelled growth in double figures, although growth has been more subdued of late. Even the modest target of 4.5-5% for 2024 may prove too ambitious.

There are hopes that China will shift into more of a consumer society with a burgeoning middle class, although such hopes have produced few tangible results other than the overheated property market. Nonetheless, evidence is emerging that political leaders are beginning to shift the emphasis from manufacturing to services, which expended faster than expected last month.

This change in emphasis will demand more investment in infrastructure despite some big leaps forward in areas such as telecoms and transport. China does have some scope for such investments, as its debt-to-GDP ratio at about 110% is less than half that of near neighbour Japan and less than that for the US.

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Among all the expert opinions, that of the Manila-based Asian Development Bank (ADB) probably has its finger nearest to the pulse. It has revised its 2023 growth forecast for China up from 4.9% to 5.2% and, although it is keeping its expectations for 2024 at 4.5%, the implications are that this figure will subsequently be edged upwards rather than downwards. This type of economic forecast is the most notable for being wide of the mark, so experts are reluctant to move until they are sure. Growth forecasts tend to lag rather than foresee actual events.

The ADB reckons China’s economy grew faster than expected in the third quarter, by 4.9%, and the economic measures taken by Beijing really are having an effect, particularly on consumption and on industrial activity.

The bank believes a stronger Chinese economy will have positive repercussions for developing countries in Asia, with robust domestic demand, stronger remittances from overseas and a recovery in tourism also helping to produce growth of just under 5% this year and next.

Investors should remember that events can change very quickly, but nevertheless the prognosis for much of Asia is better than that for most if not all Western nations.

Rodney Hobson is a freelance contributor and not a direct employee of interactive investor.