The Consumption Challenge
While private consumption only accounts for about 40% of China’s GDP, weakening external demand has put the spotlight on domestic consumption. China continues to rely on investment and exports. However, Beijing has pushed to transition toward a consumption-driven economy to ease reliance on external demand.
US tariffs have weighed on demand for Chinese goods. Exports rose 4.4% year-on-year in August, tumbling from a 7.2% surge in July. The slump in exports and pullback in consumer spending challenge Beijing’s 5% GDP growth target, pressuring policymakers to roll out fresh stimulus.
Targeting the housing market could potentially address the root cause of China’s domestic demand and deflation paradox. A rebound in domestic consumption could ease pressure on margins and boost employment, another piece of the consumer confidence puzzle. Unemployment increased to 5.3% in August, up from 5.2% in July, while youth unemployment soared to 18.9%.
Mainland Markets Surge
The potential for more stimulus, targeting China’s housing market, has lifted investor sentiment. Mainland China’s CSI 300 climbed to a high of 4,590 on Thursday, September 25, its highest level since March 2022. The Shanghai Composite Index reached a 10-year high of 3,900 in early trading on Thursday, September 25.
Year-to-date, the CSI 300 and the Shanghai Composite Index have rallied 16.7% and 15.0%, respectively, despite US tariffs, housing market woes, and waning demand.
China’s race to dominate the AI space, its advancements in semiconductors, and expectations of further stimulus support have boosted demand for Mainland-listed stocks. Delivering policy support to the housing market and improving consumer confidence could potentially lift the Mainland Indexes toward all-time highs.
For perspective, the Hang Seng Index has surged 32.3% YTD, increasing the appeal of Mainland A-shares relative to Hong Kong-listed equities.
