Is China’s recent economic policy pivot good for your portfolio?

The Chinese economy is in bad shape and the government’s pain threshold has been reached. Economic growth is at risk of falling well below government targets in 2025, and with lots of spare capacity the economy is flirting with deflation. Home prices have continued to fall in most cities, causing an unprecedented negative wealth effect — a lingering headwind for consumption. Consumption is weak and demand for precautionary savings is strong. Youth unemployment has remained elevated at around 17%, and close to the peak seen during Covid lockdowns. Last but not least, the threat of punitive Trump administration tariffs looms large, particularly for the labor-intensive manufacturing sector.

In response to these various economic woes, the government has announced several growth initiatives since September. These have included a large increase in government bond issuance — predominantly to support local governments and targeted financial and investment institutions — and a commitment to stabilize the housing sector. Though the size of these initiatives will likely fall short of what’s needed to turn the Chinese economy around, they are welcome: They should keep the negative risk of a really bad economic outcome contained.

Perhaps the most important development has been a newfound willingness to stabilize the housing market. Details are still scarce, but the commitment matters. Achieving housing stabilization likely requires complementary policies initiatives: financial support for the completion of construction projects that are currently stalled; incentives that encourage households to move from existing low-quality homes to newly finished units; and converting unsold apartments into affordable housing.

The announced increase in government bond issuance will help the central government target several objectives: provide financial support to local governments, which are facing a substantial revenue shortfall; finance additional consumption subsidies — for example, for electric vehicles and home appliances; and ensure that public investment in technology and infrastructure remains a tailwind for Chinese GDP growth. We expect further bond issuance announcements in 2025 and over the medium term.

Going forward, the most important development will be the size and features of future fiscal policy announcements. We anticipate new housing measures equivalent to about 2% of GDP. Growth multipliers from housing are high and should prove most impactful to economic activity and financial market sentiment. We also expect additional stimulus targeting consumers, and high-tech and renewables investment. Combine these with other anticipated measures to alleviate local government revenue shortfalls, and the total policy package could exceed 5% of GDP over 2025–26. It may even be larger depending on the magnitude and breadth of tariffs levied by the Trump administration on Chinese exports to the U.S. On net, a stimulus package this large should be sufficient to stabilize growth and minimize the risk of a significant shortfall in Chinese GDP growth in 2025.

The proposed initiatives help solidify our expectation for a gradual strengthening in the global economy. It will also support an already relatively constructive global market outlook, with equities and bonds both expected to make positive contributions to decent performance outcomes in the coming year. The biggest risks to this constructive outlook include an all-out trade war, as well as further escalation in geopolitical hotspots.

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