The Viewpoint: China – Tracking Progress on Reflation

Research evidence excerpt

The Viewpoint: China – Tracking Progress on Reflation

IdeaM

What would we be watching to track China reflation?

Policy measures to address the structural issues are not likely to be as forthcoming:

An increase in social welfare spending is seen to be a long-term commitment to raise

spending permanently. Against this backdrop, policymakers remain hesitant to commit to

large-scale social welfare reforms. This is especially as the government revenue to GDP

ratio continues to decline and the outlook for public finances remains challenging.

Moreover, our China economics team notes that the 15th Five-Year Plan has already

affirmed that the growth model will remain tech-led and supply-centric, while policy

support for consumption and social welfare reforms would remain gradual.

While policymakers have slowed new manufacturing investment growth, they are not

taking aggressive steps to cut existing excess capacity due to concerns over the

implications for the labour market.

In this context, since we don’t expect meaningful policy support measures, the cyclical

improvement in exports will assume more importance in the reflation journey. To

assess the progress, we will be tracking:

1. Exports

2. Non-commodity sector profit margin

3. Wage growth

Exports recovery is broadening out: We have been highlighting that Asia’s industrial and

capex supercycle – underpinned by multiple medium-term drivers - is driving a broadening

out of Asia’s export recovery from tech to non-tech. We see China as one of the key

beneficiaries given it is positively levered to a pickup in export opportunities driven by

capex in the rest of the world in areas such as energy, defense, AI and AI infrastructure,

and industrial supply chain buildout. China’s non-semis exports have only just recently