Q4 2024 Update from the Asia Trade Floor
Stephen Chang: Hello and welcome to our Q4 Update from the Asia Trade Floor. Today, we’re delving into a pivotal moment for the Chinese economy – and what it means for investors.
Text on screen: Stephen Chang, Portfolio Manager, Asia
Q: What should investors know about the recent developments in China?
Stephen Chang: Chinese policymakers are facing the challenge of stimulating growth without resorting to the often-used credit fueled expansion given the elevated level of debt.
In late September, the People’s Bank of China cut policy rates more than expected, reduced bank’s reserve requirement ratios, lowered mortgage rates and minimum downpayment ratios for home purchases, and created new facilities to channel capital directly into equity markets.
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China’s recent stimulus measures
- Cut interest rates
- Reduced % of deposits banks must keep in reserve
- Lowered mortgage rates
- Reduced down payment ratio for new homes
- New funding schemes to support its capital markets
About three weeks later, the Ministry of Finance signalled its readiness to significantly boost fiscal spending. It announced a one-time, large-scale expansion of a debt swap programme.
The aim is to refinance off-balance-sheet debt, or "hidden debt" accumulated by local governments through various financing vehicles. This should alleviate financial pressures and free up cash for essential expenditures, including infrastructure projects.
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- To launch debt-swap programme to stabilize local government finances
- Local governments could allocate more resources to boost the economy
Q: What does this mean for investors?
Stephen Chang: For investors, this situation calls for a measured approach.
The recent policy stimulus is a positive for sentiment and technicals, likely boosting asset prices in the near term and potentially leading to increased inflows into Chinese assets.
If bearish sentiment diminishes, we could see further spread compression in China credit and high-beta Asian credits, as well as in frontier markets like Pakistan.
However, we remain cautious about whether this represents a true structural turnaround. Additional easing is needed to achieve a sustainable recovery and address ongoing issues such as weakening household demand and depressed asset prices.
While the announced measures are a step in the right direction, we will closely monitor upcoming fiscal policy announcements.
We expect China’s growth to slow to 4%–4.5% in 2025, down from 5% in 2023 and 2024, and anticipate continued deflationary pressures that could impact other regional economies.
Looking further ahead over the next 3 to 5 years, the evolving composition of China’s economic drivers will significantly affect global trade relations and the broader economy.
As the country shifts from debt-fuelled growth to higher-quality growth focused on innovation and sustainability, new winners and losers among sectors and asset classes will emerge.
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PIMCO’s Outlook for China
- 4% to 4.5% GDP growth in 2025
- Persistent deflation in China may impact the global economy
- China's economic evolution will significantly affect global trade relations
- Shift to higher-quality growth will create new sector winners and losers
As we assess these developments, it’s prudent for investors to consider diversifying their portfolios, as other emerging markets are showing more promising growth trajectories and may offer more attractive opportunities.
Q: What opportunities do you see in other emerging markets?
Stephen Chang: India presents a compelling opportunity for investors, especially as capital shifts away from China.
The country has shown strong economic resilience, with a robust IPO cycle and increasing foreign investment.
The ongoing structural reforms and government initiatives aimed at boosting infrastructure and consumption further enhance its attractiveness.
While China’s growth is expected to slow, India is expected to maintain a higher growth trajectory, with estimates suggesting low double-digit nominal growth.
This positions India as a more favorable destination for investment, particularly in sectors like technology, consumer goods, and infrastructure.
As global investors seek diversification, India’s rising prominence in major indices is likely to attract further inflows, making it a key market to watch.
In our latest published outlook for the next 6 to 12 months, we highlighted other emerging markets that present opportunities.
These include South Africa and Peru, where yield curves are steep and political conditions are stable or improving.
Turkey also remains of interest, given the ongoing pivot to greater economic orthodoxy.
Overall, as developed economies slow and potential trade and geopolitical conflicts loom, we believe investors should favour caution and flexibility in portfolio positioning.
As central banks lower short-term rates, we expect yield curves to steepen, creating a favourable environment for fixed income investments.