More to be done to boost domestic demand, China’s property prices expected to stabilize this year

Lynn Song, Chief Economist, Greater China, ING, believes that economic stimulus has a greater impact on mainland China’s economy than tariffs, and he draws attention to measures to support domestic demand. Last year, mainland China invested RMB300 billion to support the “Two New” policies (large-scale equipment replacement, consumer goods replacement), automobiles, home appliances at the end of the year to reverse the year-on-year decline at the beginning of 2024. Lynn notes that mainland China’s economy, employment tensions, and the overall momentum of consumer spending have not yet seen a significant rebound, and there still needs to be policies to boost consumer confidence. 

Lynn points out that mainland China enterprises are in an "involution" environment (with vicious, excessive competition). Enterprises are controlling costs and citizens are more cautious with consumption, forming a vicious cycle that requires larger consumption policies to break. Last year, the Chinese government introduced consumption vouchers, subsidies and other measures that were rare in the past, showing that the authorities have paid more attention to consumption. In January, the Chinese government announced the expansion of the "Two New" policies, including adding subsidy categories for home appliances and digital products such as mobile phones. Lynn believes that there is room for continued expansion, for example, subsidizing optional consumer goods and shortening the product consumption cycle, which were of effect last year. 

According to Lynn, there is a need to stabilize asset prices before consumption can improve. Since the end of September last year, the Chinese stock market has begun to stabilize, and the real estate prices and transactions in first and second-tier cities have also stabilized. It is expected that this year, real estate prices can stabilize as well. Although there will not be a significant recovery, a pause in further decline has already helped fortify consumer confidence. Lynn expects consumption growth to rebound from 3.5% to 4.5% this year, and to accelerate to 5% if policies are more robust than expected. In terms of the whole economy, external demand is still under pressure, and there are more uncertainties in policy and US-China relations, so it is still wait-and-see for more policies before making conclusions on whether economic growth is accelerating. 

Interest rate may be reduced by 0.3% for the whole year 

In terms of monetary policy, Lynn believes that the PBOC may wait until after the Two Sessions in March to announce interest rate cuts and reserve requirement ratio cuts together with other fiscal policies. Currently, the actual interest rate is still high and there is room for interest rate cuts. It is expected that the interest rate will be cut by another 0.3% and that the reserve requirement ratio will be lowered by 1% this year. 

Originally published in Ming Pao: Opens in a new tabhttps://news.mingpao.com/pns/%E7%B6%93%E6%BF%9F/article/20250217/s00004/1739725513847/ing