Macro: Sandcastle economics
Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.
Chief China Strategist
Summary: China's political meetings in Q4 of 2023 reveal a lack of urgency in prioritising counter-cyclical initiatives. The direction of development strategies hinges on the Q1 2024 Third Plenum. Technology, advanced manufacturing, energy, and green metals may provide fertile ground for medium-term growth, despite challenges and uncertainty.
The Central Financial Work Conference (CFWC), Politburo meeting, and Central Economic Work Conference (CEWC) convened in Q4 of 2023 to offer a glimpse into China's future policy landscape.
Notably, the CFWC's official communication sidestepped discussions on deleveraging, opting instead to address risks within the property sector. However, a less accommodating message was sent in an article in Qiushi, a Party mouthpiece, underscoring President Xi’s directives at the conference to adhere to Marxist political economy theories for reforming the financial system. Intriguingly, the article, marked by 23 references to "risks", conspicuously avoided mentioning resolving property sector risks or local government debts. The overarching theme stressed Party control over the financial system.
In the subsequent CEWC, President Xi prioritised "seeking progress while ensuring stability" and "high-quality development", which are codes that downplay economic growth. Among the nine 2024 priorities, "developing new industries and business models through technological innovation" takes precedence. These priorities lack urgency for counter-cyclical policies. Echoing the readout from the latest Politburo meeting, the CEWC hinted at fiscal and industrial policy escalation, with stable monetary policies, side-lining short-term growth stimulation.
To avert China’s growth decline, imperative measures include productivity enhancement, and restoring entrepreneurial confidence. In addition, property sector debts will need to be restructured and projects taken over. The critical period of Q1 2024 will serve as a litmus test. Post-Third Plenum, a clearer understanding of China's economic policies and strategic directions will emerge. Presently, navigating through the macroeconomic landscape involves a degree of uncertainty.
It’s time to remain humble, cautious and flexible as market conditions evolve. We’re not able to see the future through a fictional gap in the curtain as in John Buchan’s classic. This doesn’t mean we should disregard the macro contextual conditions or be led by the narratives of the day. As Howard Marks, founder of Oaktree Capital Management, emphasises: “We can’t predict, but we can prepare. An awareness of the economic, credit, and sentiment cycles can help with investment.”
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