Macroscope | Time for caution is over: China needs drastic action to spark demand

Structural reform is never easy, but for China even a messy pivot to consumption is better than staying cautious and not pivoting at all

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A woman shops at a supermarket in Tengzhou in east China’s Shandong province on April 11, 2024. Photo: Xinhua

Published: 4:30pm, 9 Jan 2025Updated: 5:37pm, 9 Jan 2025

JPMorgan calls it “the most comprehensive, coordinated policy easing in recent years”. Goldman Sachs says policymakers have “finally changed course amid growing economic headwinds and unleashed a set of more forceful and more coordinated easing measures”, while both Bank of America and Morgan Stanley believe there has been a significant policy pivot.

Wall Street banks have not been this bullish on the prospects for Chinese economic stimulus in years. Ever since China’s post-pandemic recovery faltered, investors have been waiting for Beijing to take more aggressive action to boost domestic demand and put an end to the longest period of deflation since the late 1990s.

The decisive shift during the past several months towards bolder monetary and fiscal policies, in particular the government’s decision in early December to prioritise domestic consumption, has given a much-needed fillip to Chinese stocks.

The Shanghai Composite Index and Hang Seng Index were among the best-performing major financial assets last year. A “fast and furious rally” served as a reminder that China remains a large and liquid market that investors should not ignore, Bank of America said.

However, the rally in equity markets was already fading by the end of last year. Its success had more to do with relief that Beijing finally recognised the severity of the downturn and hopes that the re-election of Donald Trump as US president would be a catalyst for policies to stimulate domestic demand to help offset the blow to exports from the imposition of higher tariffs.

Yet just a cursory glance at China’s government debt market – a more reliable gauge of economic conditions – shows the lack of confidence in policymakers’ ability to reflate the economy. The yield on China’s 10-year bond has fallen more sharply since the policy shift in September, dropping to a record low of 1.6 per cent, only just above its Japanese equivalent.