Macro views
Macro views

China: From quantity, to quality of growth

Quick takes on capital markets

April 28, 2023 | 2 min read

Following a sluggish 2022, many investors expected a countercyclical stimulus response this year, the typical approach from China’s policymakers in the past. However, recent policy suggests that a shift is underway—one that emphasizes nimble and long-term focused policymaking and aims to avoid excessive stimulus. The result has been a more stable outlook for China, making the country a bright spot amid significant global uncertainty.

China Credit Impulse Index
Level, 2008-present

Credit Impulse Index compared to CSI 300 Index EPS growth, 2008 to Present

Note: The China Credit Impulse Index measures the credit cycle in a market. A rising level indicates the economy is recovering.
Source: Bloomberg, Principal Global Investors. Data as of March 31, 2023.

China’s credit impulse experienced a much lower peak in 2022 than during prior cycles, reflecting an important policy shift. After adopting countercyclical policies, which involve large fiscal stimulus and credit boosts during economic slowdowns, for over a decade, China’s policymakers have been gradually adjusting their policy approach toward “cross-cyclical adjustment.” This strategy emphasizes preemptive, nimble, targeted, and long-term focused policymaking, and avoids excessive and ineffective stimulus.

Global investors may be disappointed as the policy shift implies China’s economic growth is unlikely to revert to the elevated levels seen in the last decade. However, slower growth is not necessarily a negative development. The previous adoption of “countercyclical policies” often left the Chinese economy veering from sharp upturns to significant slowdowns, rendering it reliant on easy money.

Now, with the adoption of the “cross-cyclical adjustment” framework, investors should expect that China’s credit growth trajectory will be managed such that it doesn’t lead to boom-bust cycles and excessive leverage. The country should emerge with a stronger balance sheet and less financial risks.

The seemingly prudent and positive policy actions have resulted in a stable outlook for China and make the country a bright spot amid significant global economic uncertainty. Investors, treating China as a key diversifier of global portfolios, should return focus to organic economic growth and bottom-up fundamentals, instead of speculating on large policy stimulus.

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