The recent shift in China's economic rhetoric has captured the attention of global markets. Chinese authorities have moved from a longstanding focus on supply-side policies to now emphasizing domestic consumption and demand. This change, emerging after the Covid pandemic, has rekindled hopes for a long-awaited stimulus plan.
Chinese public policy, known for its support to businesses through grants and tax credits, now aims to "vigorously boost consumption," a priority confirmed during recent parliamentary sessions with an ambitious 2025 growth target of 5%. The plan's announcement was greeted positively by markets, especially within China's tech sector, amid what was dubbed the "DeepSeek effect."
However, deeper concerns persist. Authorities remain cautious about a consumer confidence crisis and the risks of heightened US trade tariffs. Since 2015, the aim was to shift growth from investment to consumption, but public policies have not consistently reflected this objective. Investment as a GDP share rose post-Covid, and now the government is compelled to explore more rigorous measures to revive consumer spending.
The government has unveiled initiatives like a 300 billion yuan consumer goods trade-in program and raised minimum wage levels, coupled with widened social security coverage, targeting vulnerable job groups. Childcare subsidies are also part of efforts to address a shrinking population, with fertility rates low at 1.1 children per woman.
Despite measures, challenges linger. Retail sales rose by 4% early this year, but this increase incurred high fiscal costs as deflation saw prices fall by 0.7% in February. A worrying trend is seen in the real estate sector, which remains stagnant as new home construction declines despite some stock valuation improvements.
In real estate, public sector roles in property transactions have expanded, as over 50% of private developers collapsed since 2021, leading state-owned enterprises to manage ongoing projects and falling prices.
On the international front, the US administration's recent 10% tariff rises pose added complexity to China's economy. While cautious responses from Beijing included targeted tariffs on US goods, any potential negotiations await as the US, focusing on the yuan's value, is hesitant to engage.
China expects tough months ahead, amplified by the possibility of global tariff barriers against its products, notably steel and aluminum, despite intentions to reduce overcapacity in these sectors. The limiting factors for China remain domestic, concerning employment and social stability.
This alteration in rhetoric suggests that China acknowledges its model's limits and the need for a consumer-driven growth engine. Future measures and resources to stimulate consumption policies, as well as local governments' capability to implement these, remain uncertain.