China: Targeted stimulus supports growth – Societe Generale

Societe Generale strategist Michelle Lam scrutinizes recent economic policies in China, concluding that targeted property and monetary easing measures will maintain growth and enable the nation to achieve its GDP objective at the lower end of the projected range. She points out that mortgage subsidies have minimal impact, infrastructure spending is limited due to local government financial constraints, and a K-shaped recovery is occurring driven by technology and manufacturing rather than household demand.

The Chinese government recently introduced a fresh round of tailored property and monetary easing measures to stabilize growth after a slowdown. Though these measures are sufficient to keep growth on track and assist China in meeting this year's GDP target, they do not address the economy's underlying structural demand weaknesses.

These measures will likely result in a rebound in FAI in the coming months. However, the decline in fixed-asset investment this year highlights a growing disparity between the central government's ambition to boost growth through infrastructure spending and the local governments' increasing budgetary limitations. With these targeted measures and the State Council's recent emphasis on meeting this year's development targets, Societe Generale expects China to reach its GDP target at the lower end of the forecast range, at 4.5%.

While these measures reduce the urgency for the People's Bank of China to cut interest rates, especially considering the Federal Reserve's recent rate hikes, the economy remains primarily propelled by technology investment and manufacturing upgrades, while household demand continues to lag. Until policymakers implement more robust demand-side measures that directly benefit households, the economy is likely to remain entrapped in structural stagnation.