China’s post-Covid recovery has fallen short of expectations, with economic performance consistently lagging behind forecasts. This has led to mounting global expectations for bold action from Beijing. But what’s behind this slowdown, and which steps should policymakers consider to bring growth back on track?
At the core of the issue is low consumer confidence, which has yet to return to pre-pandemic levels. Data indicates that household sentiment remains weak across China.
One key factor dampening consumer spending is the continued decline in property prices. Given limited investment channels due to capital controls, around 63% of Chinese household wealth is tied to real estate. As property values drop, households face financial strain, curtailing domestic consumption.
This surplus in housing didn’t emerge overnight; it’s the product of a decade-long building boom initiated after the global financial crisis, mainly financed by local governments and state-backed entities. Now, the resulting oversupply has left both households and local governments facing negative equity, further limiting their ability to spend or invest.
What steps are crucial for sparking a new phase of growth in China?
Recently, however, there are signs Beijing has reached a tipping point on the deflationary slump in China’s economy. A set of policy measures announced on 24 September spurred a rally in onshore equities. Looser financial conditions and relaxed housing regulations may prompt some economic activity, but ultimately, substantial fiscal stimulus will likely be crucial for a sustained economic and market recovery.
This policy response follows weak economic data from August and September, which appears to have tested the government’s patience. Equity markets surged in response to these policy signals—an ironic twist, where bad economic news has turned out to boost investor sentiment.
One of the primary drivers behind the equity market surge has been direct intervention by the Chinese government, which pledged USD 112 billion to stabilize capital markets and restore investor confidence through stock buybacks and added liquidity for brokerages. Additional liquidity support spurred a rise in retail investor interest. Since the policy announcement, MSCI China has risen over 30% in local currency, though other China-sensitive markets, like copper (+4%) and corporate bonds (+0.5%), have shown a more cautious response as investors wait to see if equity gains translate into wider economic recovery.
Beijing also announced several measures to ease monetary policy, with promises of more to come. The 7-day reverse repo rate was reduced by 20bps to 1.50%, the one-year medium-term lending facility rate (MLF) was cut by 30bps to 2%, and bank reserve requirements were reduced by 50bps. At the same time, further housing policy relaxations were introduced, such as lower down payment requirements and the lifting of restrictions on purchasing additional homes. These adjustments, including a 50bps interest rate cut on new and existing mortgages, aim to reduce monthly payments and stimulate spending.
However, although looser financial conditions offer a brighter economic outlook, they may take time to gain traction. The ongoing challenges in real estate suggest that further easing in housing restrictions might not yield an immediate impact. While indicators like real M1 (a measure of money supply) may soon show improvement, it could be the latter half of 2025 before a tangible uplift in economic activity occurs.
In the short term, fiscal stimulus remains critical for immediate economic support. Market expectations were left unfulfilled when no announcements emerged from the National Development and Reform Commission’s recent press conference, though officials have indicated they plan to “increase the intensity of fiscal and monetary policies” to bolster growth. To significantly improve the outlook, fiscal stimulus of around 4-5% of GDP, focused on stimulating demand, may be essential.
Ultimately, the solution lies in addressing the excess housing supply and restructuring debt. The problem and its solution are clear; now, it’s up to Beijing to fully commit to the path that can truly reignite China’s growth trajectory.
What Could This Mean for South Africa and South African Equity Markets?
South Africa’s recent market rally has primarily been driven by positive political developments following the May 2024 election, which opened the door for potential stability and economic reform. With the African National Congress (ANC) falling short of a majority, the possibility of a coalition with the Democratic Alliance (DA) has sparked investor optimism, signaling a potentially market-friendly approach focused on fiscal discipline, anti-corruption measures, and structural reforms. This political shift has bolstered confidence in the Johannesburg Stock Exchange (JSE) and the rand, as stable governance and reform-focused policies could improve South Africa’s economic outlook across sectors.
Global factors, particularly the expected rate cuts in developed economies like the U.S. and Eurozone, have further supported this rally. With growth slowing in these regions, investors are increasingly seeking higher returns in emerging markets like South Africa. This “search-for-yield” sentiment has made South African assets, particularly in financials, mining, and industrials, attractive to global investors, as they provide relatively better growth prospects amid global uncertainty.
Domestically, the South African Reserve Bank (SARB) has also started its own rate-cutting cycle, aligning with the global trend of monetary easing. Lower borrowing costs are expected to support economic growth through increased consumer spending and business investment, adding momentum to the JSE as investors anticipate economic expansion and higher corporate earnings.
China’s Economic Trajectory: Potential Catalyst or Challenge?
China’s economic health is crucial for South Africa’s outlook, given the strong trade ties between the two countries. As South Africa’s largest trading partner, China imports substantial amounts of raw materials like iron ore, coal, and other minerals that fuel its industrial base. However, if China’s economic challenges—such as weak consumer confidence and a struggling property market—continue to impact its domestic demand, South Africa’s economy could feel the strain. A slowdown in Chinese demand for these key commodities would likely reduce South Africa’s export revenues, which could weigh on GDP growth and affect the balance of trade.
In this scenario, the materials sector, which has a strong presence on the JSE, would likely bear the brunt of any sustained slowdown in China. Major mining companies like Anglo American and BHP Group, which are heavily reliant on Chinese demand, could see earnings pressure as global commodity prices fall. This reduced demand from China’s construction and manufacturing sectors could create volatility in the JSE, especially within mining stocks.
However, if Beijing’s recent fiscal interventions, such as infrastructure investment and looser financial conditions, manage to revitalize its economy, South Africa could see a significant boost. Increased infrastructure spending and a recovery in China’s property market would likely drive up demand for South African commodities, providing a much-needed lift for mining exports. Such an increase would positively impact the JSE’s materials sector, particularly for companies tied to the commodities cycle, as higher export revenues flow into the economy. This improved outlook could also attract further foreign investment into South Africa’s capital markets, enhancing liquidity and supporting long-term growth.
South Africa’s market rally is rooted in political developments and supportive monetary policies, yet China’s economic trajectory holds the potential to serve as a powerful catalyst. Should China’s demand for commodities rebound, it could accelerate growth in South Africa’s mining, construction, and industrial sectors, reinforcing overall economic resilience and expanding the investment potential within South Africa’s capital markets. However, continued weakness in China’s economy could pose challenges, particularly for sectors heavily reliant on export revenues, such as mining and commodities.