Morgan Stanley
Wealth Management

What Will Revive China’s Economy?

Oct 16, 2024

China’s biggest stimulus since the pandemic has boosted equities, but it may fall short of pulling the economy out of its slump.

Author
Lisa Shalett
Lisa Shalett

Key Takeaways

  • China’s recent stimulus package, the largest since the pandemic, has boosted equities but may not be enough to reinvigorate growth.
  • The country’s crashing residential property market is contributing to a deflationary spiral that some experts believe can only be cured by a massive government rescue.
  • Also, the Chinese central bank may need to take more aggressive action to ease the high cost of capital weighing on growth.
  • Investors may want to consider diversifying portfolios with global, non-U.S. and non-China emerging market equities. 

Chinese equities have surged in recent weeks, following more than three years of a bear market, as China recently unveiled its biggest stimulus since the pandemic, aimed at pulling the economy out of a slump and back toward its growth target. But global investors now face the question: Will it be enough to ease the country’s deflationary debt spiral and reinvigorate growth?

 

The package announced in recent weeks is ambitious. The People's Bank of China cut bank-reserve requirements, which leaves banks more cash available to lend to businesses and individuals. It also lowered interest rates, as well as reducing mortgage rates and minimum down payments on second homes, to help stabilize home prices and spur demand. Finally, policymakers committed hundreds of billions of yuan to provide liquidity support for markets and to help local governments spur job creation and household consumption.

 

Equity markets cheered. The MSCI China Index, having been down some 60% from the beginning of 2021 to March 2024, soared nearly 40% between mid-September and the first week of October before settling down to a roughly 20% gain since the plans were revealed.

Reasons for Caution

Still, Morgan Stanley’s Global Investment Office believes more policy action is likely needed. While Beijing’s recent efforts are a step in the right direction and could help boost China’s GDP growth for the next year, they may not be enough to address at least two key structural problems facing the economy. 

Wealth Management

The China Factor

Recent stimulus from China has lifted equities but also raises questions whether the program is enough to address structural challenges facing China’s real economy.

n/a

  • A beleaguered residential real estate market: Excess supply and collapsing confidence have led to declining home prices. This, in turn, has contributed to a deflationary spiral—in which prices fall and the burden of mortgage debt rises. (Generally, deflation makes debt harder to repay, because even though prices are falling, so is the value of assets, while the amount owed remains the same.) China’s challenge is so severe that some experts believe nothing short of a massive rescue program—akin to measures taken during the 2007-2009 financial crisis—will cure it. Morgan Stanley analysts estimate the cost of such a program might be as much as five times the current announced and speculated stimulus programs.

 

  • A high cost of capital: Equally constraining has been the central bank’s reticence to get aggressive about the “real” cost of capital. While nominal rates have fallen and now are around 3.6%, they are closer to 5% when adjusted for deflation. For perspective, U.S. real rates have stabilized around 1.5% to 1.75% in the last year. This dynamic has kept the renminbi’s value relatively high versus the U.S. dollar, yet a weaker domestic currency would likely be more beneficial by making China’s exports cheaper to foreign buyers. This could help domestic manufacturers, many of them suffering from spare capacity.

 

Beyond these challenges, China also struggles with poor consumer sentiment, disappointing youth employment prospects and confusing messaging around the government’s support of equity markets, not to mention more immediate threats from geopolitical rifts with the U.S.

How to Invest

For now, Beijing’s efforts are more likely to support a tactical bounce in equity markets, but fall short of the catalysts for a new bull market.

 

Investors should watch the renminbi for signs of strength, as that will be an indicator that stimulus efforts are actually working on the real economy.

 

Consider adding to global, non-U.S. and non-China emerging-market equities as part of a diversified portfolio. U.S. cyclicals may also get a short-term boost.

 

This article is based on Lisa Shalett’s Global Investment Committee Weekly report from October 14, 2024, “The China Factor.” Ask your Morgan Stanley Financial Advisor for a copy. Listen to the audiocast based on this report.

Find a Financial Advisor, Branch and Private Wealth Advisor near you. 

Check the background of Our Firm and Investment Professionals on FINRA's Broker/Check.

Wealth Management DIY Investors: Why Choose a Morgan Stanley Financial Advisor Why DIY investors have confidence in the investing decisions they make together with a Morgan Stanley Financial Advisor. Get the facts.
Wealth Management Don’t Count on Big Gains for Bonds With the likelihood of a recession falling after the Fed rate cut, investors are wondering what a “soft landing” will mean for bonds.
Wealth Management What’s Next After the Fed’s Rate Cut The rate cut could bode well for an economic soft landing, but now companies will need to deliver on ambitious earnings growth. Here’s why.
Wealth Management Conflicting Views on Rate Cuts With this week’s widely anticipated rate cut, equity markets seem optimistic about the economy, but bond investors worry the Fed may have missed its window to forestall a recession. Who’s right?
DIY Investors: Why Choose a Morgan Stanley Financial Advisor
Wealth Management DIY Investors: Why Choose a Morgan Stanley Financial Advisor
Don’t Count on Big Gains for Bonds
Wealth Management Don’t Count on Big Gains for Bonds
What’s Next After the Fed’s Rate Cut
Wealth Management What’s Next After the Fed’s Rate Cut
Conflicting Views on Rate Cuts
Wealth Management Conflicting Views on Rate Cuts

Discover More

Insights to help you go further.

Morgan Stanley Wealth Management Wealth Management Portfolio Insights

Index Definitions

For index, indicator and survey definitions referenced in this report please visit the following:

https://www.morganstanley.com/wealth-investmentsolutions/wmir-definitions

Risk Considerations

Equity securities may fluctuate in response to news on companies, industries, market conditions and general economic environment.

Investing in foreign markets entails greater risks than those normally associated with domestic markets, such as political, currency, economic and market risks. Investing in currency involves additional special risks such as credit, interest rate fluctuations, derivative investment risk, and domestic and foreign inflation rates, which can be volatile and may be less liquid than other securities and more sensitive to the effect of varied economic conditions. In addition, international investing entails greater risk, as well as greater potential rewards compared to U.S. investing. These risks include political and economic uncertainties of foreign countries as well as the risk of currency fluctuations. These risks are magnified in countries with emerging markets and frontier markets, since these countries may have relatively unstable governments and less established markets and economies.

Asset allocation and diversification do not assure a profit or protect against loss in declining financial markets.

Investing in smaller companies involves greater risks not associated with investing in more established companies, such as business risk, significant stock price fluctuations and illiquidity.

Stocks of medium-sized companies entail special risks, such as limited product lines, markets, and financial resources, and greater market volatility than securities of larger, more-established companies.

Value investing does not guarantee a profit or eliminate risk. Not all companies whose stocks are considered to be value stocks are able to turn their business around or successfully employ corrective strategies which would result in stock prices that do not rise as initially expected.

Growth investing does not guarantee a profit or eliminate risk. The stocks of these companies can have relatively high valuations. Because of these high valuations, an investment in a growth stock can be more risky than an investment in a company with more modest growth expectations.

Environmental, Social and Governance (“ESG”) investments in a portfolio may experience performance that is lower or higher than a portfolio not employing such practices. Portfolios with ESG restrictions and strategies as well as ESG investments may not be able to take advantage of the same opportunities or market trends as portfolios where ESG criteria is not applied. There are inconsistent ESG definitions and criteria within the industry, as well as multiple ESG ratings providers that provide ESG ratings of the same subject companies and/or securities that vary among the providers. Certain issuers of investments may have differing and inconsistent views concerning ESG criteria where the ESG claims made in offering documents or other literature may overstate ESG impact. ESG designations are as of the date of this material, and no assurance is provided that the underlying assets have maintained or will maintain and such designation or any stated ESG compliance. As a result, it is difficult to compare ESG investment products or to evaluate an ESG investment product in comparison to one that does not focus on ESG. Investors should also independently consider whether the ESG investment product meets their own ESG objectives or criteria. There is no assurance that an ESG investing strategy or techniques employed will be successful. Past performance is not a guarantee or a dependable measure of future results.

Artificial intelligence (AI) is subject to limitations, and you should be aware that any output from an IA-supported tool or service made available by the Firm for your use is subject to such limitations, including but not limited to inaccuracy, incompleteness, or embedded bias.  You should always verify the results of any AI-generated output.

Rebalancing does not protect against a loss in declining financial markets.  There may be a potential tax implication with a rebalancing strategy.  Investors should consult with their tax advisor before implementing such a strategy.

The indices are unmanaged. An investor cannot invest directly in an index.  They are shown for illustrative purposes only and do not represent the performance of any specific investment. The indices are not subject to expenses or fees and are often comprised of securities and other investment instruments the liquidity of which is not restricted. A particular investment product may consist of securities significantly different than those in any index referred to herein. Comparing an investment to a particular index may be of limited use.

The indices selected by Morgan Stanley Wealth Management to measure performance are representative of broad asset classes.  Morgan Stanley Wealth Management retains the right to change representative indices at any time.

Disclosures

Morgan Stanley Wealth Management is the trade name of Morgan Stanley Smith Barney LLC, a registered broker-dealer in the United States. This material has been prepared for informational purposes only and is not an offer to buy or sell or a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy.  Past performance is not necessarily a guide to future performance.

Morgan Stanley Smith Barney LLC, its affiliates and Morgan Stanley Financial Advisors do not provide legal or tax advice.  Each client should always consult his/her personal tax and/or legal advisor for information concerning his/her individual situation and to learn about any potential tax or other implications that may result from acting on a particular recommendation.

This material, or any portion thereof, may not be reprinted, sold or redistributed without the written consent of Morgan Stanley Smith Barney LLC.

© 2024 Morgan Stanley Smith Barney LLC, Member SIPC.          

CRC# 3939770 (10/2024)

View Disclosures Close Disclosures