The Chinese economy is currently navigating a complex mix of low inflation, slow growth, and an uncertain path forward for domestic demand. Here’s a deep dive into the recent economic indicators and the steps the government is taking to stimulate the economy.

1. Low Inflation, Driven by Food Prices

In September, China’s inflation rate remained subdued, with consumer prices rising just 0.4% from the previous year—the lowest rate since June. This slight increase was mostly fueled by rising food costs, which went up by 3.3%, largely driven by a 16.2% surge in pork prices. Meanwhile, other categories like energy prices saw declines, highlighting the impact of poor weather conditions on food production while demand across other sectors remained weak.

The core inflation rate (which excludes volatile food and energy prices) was up only 0.1% from the previous year, marking the lowest rate since early 2021. The lack of price growth reflects China’s excess capacity, or production outpacing demand, which puts downward pressure on prices. This trend is also visible in the producer price index, which fell by 2.8% year-over-year in September, along with a 6.9% decrease in the price of electric vehicles sold domestically.

2. Government’s Fiscal Policy Push: Four Key Strategies

In response to weak domestic demand, China’s government recently signaled a move toward more aggressive fiscal policies, though detailed plans remain vague. Finance Minister Lan Fo’An outlined four main policies aimed at stimulating the economy:

1. Debt Support for Local Governments: A one-time debt ceiling increase for local governments will help relieve debt burdens, with special bonds allocated to purchase unused land and existing homes from property developers, and to provide homeownership subsidies.
2. Issuing Special Bonds for Bank Capital: This measure will bolster banks’ capacity to lend, ensuring they remain liquid and capable of supporting local economies.
3. Reviving the Property Market: The property sector, essential to China’s economic health, will be propped up by local government investments to halt the downturn, which has seen investments down 10.1% year-over-year.
4. Student Aid to Boost Spending: Aiming to drive domestic consumption, the government plans to provide aid to students, encouraging spending across various sectors.

While these strategies aim to address specific challenges, the government has refrained from announcing the scale of any additional fiscal stimulus, leaving investors uncertain about its potential impact.

3. Slower GDP Growth but Rising Optimism for 2024

China’s GDP grew by 4.6% year-over-year in the third quarter of 2024, falling short of the government’s 5% target and marking the slowest growth rate in six quarters. Despite this, the quarterly increase of 0.9% between Q2 and Q3 surpassed investor expectations, reflecting moderate resilience. Retail sales rose by 3.2% in September from a year earlier, with significant growth in categories like grain, appliances, and medicine. However, cosmetics, jewelry, and building materials all saw declines, illustrating the uneven nature of consumer demand.

Industrial production also performed well, up 5.4% year-over-year in September. Within manufacturing, key areas like non-auto transportation, computing and communication equipment, and metal smelting saw strong growth. However, fixed-asset investment grew only modestly at 3.4% year-over-year, with a stark 10.1% decline in property investment, while manufacturing and utilities showed promising investment growth.

4. Slowing Exports and Weak Imports

After months of growth, China’s export growth slowed in September, rising only 2.4% year-over-year—the slowest pace since April. This was attributed to disruptions from extreme weather and falling domestic prices, which affected export pricing. Import growth, too, was minimal, up just 0.3% in September, reflecting both weak domestic demand and a decrease in export orders that require imported inputs. Interestingly, imports from the U.S. and Southeast Asia increased, while those from the EU dropped.

5. Stock Market Reactions and Financial Interventions

To support market confidence, China’s central bank introduced measures to encourage non-bank financial institutions to purchase equities. This triggered a rally in Chinese stock prices despite the weaker economic outlook, underscoring the demand for liquidity and fiscal stimulus. However, investors are still waiting for a more comprehensive stimulus plan to support long-term growth.

U.S. Bond Market Trends and Inflation Concerns

Across the Pacific, the United States is experiencing its own set of financial challenges, which have implications for global investors. Bond yields on the U.S. 10-year Treasury have surged to their highest levels since July, despite recent Federal Reserve interest rate cuts. This rise in yields suggests that investors expect inflation to remain high over the next decade, despite the Fed’s efforts to keep inflation in check.

The so-called “breakeven rate,” which indicates expected inflation, rose from 2.02% in early September to 2.33%, implying that investors foresee inflation averaging close to the Fed’s 2% target over the next 10 years. However, strong U.S. employment data and inflation reports have raised concerns about the potential for the Fed to cut rates too quickly. Investor confidence in growth combined with anticipated rate cuts have driven U.S. equity prices higher, while yield spreads between corporate bonds and Treasury bonds have shrunk significantly.

European Central Bank’s Rate Cuts and Eurozone Challenges

In Europe, the ECB recently cut interest rates by 25 basis points for the third time since June, reducing the benchmark rate to 3.25%. With Eurozone inflation subsiding and economic conditions weakening, ECB President Christine Lagarde noted the ongoing challenge of controlling service-sector inflation due to rising wages. The ECB hopes that easing monetary policy will protect Europe’s fragile economy from a potential downturn.

European exports to China, a significant driver of growth, dropped by 11% in August. As China considers a potential stimulus, there’s hope for revived demand from China, which could help support Europe’s economic recovery.

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Looking Ahead

China’s economic challenges underscore the balancing act facing its government as it navigates low inflation, weak demand, and slow growth. With a modest but targeted fiscal strategy in place, China aims to stimulate key sectors like property and manufacturing. However, the global ripple effects of China’s economic policies and performance will continue to shape financial markets from the U.S. to Europe, as policymakers around the world respond to shifting growth and inflation trends.

As investors look to the Chinese government for clarity on a large-scale stimulus plan, the road ahead will be one of cautious optimism—one that hinges on China’s ability to ignite domestic demand while mitigating the impacts of global economic headwinds.