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SPI Management Newsletter 08.12.23

China's Economic Prospects: Navigating a Changing Landscape in 2024

Post the 2007-09 global financial crisis, economists recognized that the world economy was transitioning to a "new normal." China, too, embraced this concept, signaling a move away from its rapid growth model. This shift was seen as an essential evolution, not to be resisted.

Recent developments, including China’s COVID-19 response and a lackluster reopening, have reignited discussions about this new normal. Moody's, a rating agency, hinted at a potential downgrade of China’s credit rating due to structurally weaker growth prospects. Economists are recalibrating their expectations, and China’s property market is no exception, undergoing significant changes.

The Chinese government is preparing for the Communist Party's Central Economic Work Conference in Beijing, where 2024's growth target will be a key topic. Forecasts suggest a growth rate below 5%, with Moody’s estimating around 4%. Officials face a crucial decision: whether to accept this slowdown as a new equilibrium or to aim for a higher target, acknowledging the challenges of achieving it without the stimulus of reopening.

China’s property slump is central to these deliberations. While there’s consensus that the property market won't regain its past heights, its future trajectory remains debated. The market's shift from speculative to fundamental demand poses questions about the extent of this demand. Some analysts argue that China’s property sales might have room to grow from their current low levels, though they likely won’t reach the peaks of previous years.

A key focus is the government's "urban villages" project, potentially impacting millions and offering opportunities for property developers. However, the property sector's contraction will likely necessitate a shift towards industries like electric cars, lithium-ion batteries, and renewable energy, the “new three.” Yet, these sectors are not as labor-intensive as property, indicating a challenging transition ahead. Inflation and credit supply are two other critical factors. Despite fears of deflation and a lack of excessive credit supply, weak loan demand remains a concern.

If policymakers don’t stimulate demand, China risks entering a phase of deflation, affecting company profits, increasing debt burdens, and deepening consumer pessimism.

The upcoming decisions at the Central Economic Work Conference will be pivotal in determining whether China embraces this new normal or risks falling into a state of mediocrity, mirroring the post-crisis trajectory of many other economies. As China navigates these complex economic waters, the world watches to see how it will balance the need for growth with the realities of a changing economic landscape.

Japan's Economic Downturn Challenges Expectations of BoJ Rate Hike

Japan's financial markets experienced turbulence amid speculation about the Bank of Japan (BoJ) potentially abandoning its long-standing negative interest rates policy. However, the likelihood of a significant policy shift appears slim following recent government data indicating a sharper economic contraction in the third quarter than initially estimated.

The Japanese yen surged to a four-month high after BoJ governor Kazuo Ueda hinted at a challenging year ahead, only to slightly recede later. This currency fluctuation, coupled with a fall in the Topix and a rise in government bond yields, reflects market volatility.

The probability of a rate hike at the BoJ's December meeting was initially speculated to be around 35%. This expectation was fueled by inflation exceeding the BoJ's 2% target since April 2022 and a gradual shift in the bank's long-term interest rate cap policy. However, economic indicators suggest caution.

Revised figures show Japan's GDP contracted by 2.9% annually in the third quarter, translating into a 0.7% quarterly decrease. This downturn highlights weaknesses in household consumption and potential challenges for export-dependent businesses due to a stronger yen.

In summary, despite initial market reactions and speculations, the BoJ is expected to uphold its negative interest rate policy in the near term, given the country's economic challenges and political uncertainties. The focus remains on Japan's fundamental economic and price indicators to justify any future policy changes.

Adapted from The Economist, FT, NYT, Reuters, CNBC, `Bloomberg

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