MACROECONOMIC FOCUS

China’s policy choices in a divided world

China's shift away from stimulus reliance demands new analytical models.

China's policy landscape is being reshaped by two predominant forces: external geopolitical pressures and a distinct internal governance philosophy. Heightened tensions, particularly with the US, have steered China towards a strategy focused on self-reliance. Consequently, China is compelled to reinforce its industrial policies, aiming to secure its supply chain independence and bolster manufacturing capabilities.

Internally, a critical reassessment among policymakers, informed by the drawbacks of past stimulus measures, has underscored the necessity of rebalancing the economy. The global context conveniently supports this shift, which provides a persuasive justification for the government’s leaning towards austerity and structural reforms over stimulus measures.

Investors must therefore adjust to recalibrations in China’s future policies which aim to:

1.   Prevent excessive financialisation, potentially reversing some past liberalisation efforts that resulted in unconstrained expansion of capital;

2.   Strengthen industrial production capacities, particularly at critical points in the global supply chain;

3.   Selectively open up the economy to strike a balance between national security and economic development.

Given these strategic choices, the outlook for traditional stimulus measures, commonly favoured by the markets, appears limited. Instead, China is likely to maintain modest fiscal deficits with a strong emphasis on fiscal discipline, complemented by gradual monetary easing. Policies are likely to act as a force that depresses inflation, warranting cautious assessment.

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Date of first use: 26 July 2024.

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