Investor Presentation_ China Economics_ A Protracted Deflation Battle

Summary of the Conference Call Industry Overview - Industry: Economic Outlook for China - Company: Morgan Stanley Asia Limited Key Points and Arguments Economic Growth Projections - GDP growth is expected to soften in 2025-26 due to looming tariff shocks and entrenched deflation [6][9][11] - Real GDP growth by expenditure shows a decline from 4.8% in 2024 to 1.6% in 2026 [7] Deflationary Pressures - Deflation is likely to persist, exacerbated by overcapacity and tariff impacts [9][11] - The GDP deflator is projected to remain negative, indicating ongoing deflationary trends [12][101] Policy Responses - A significant fiscal expansion of approximately Rmb2 trillion (~1.4% of GDP) is anticipated in 2025, with an official deficit target of 4% [18][97] - The government plans to implement a Rmb10 trillion local government debt swap program to enhance liquidity [14][97] Consumption and Social Welfare - An expanded consumption subsidy program of Rmb300 billion is set to cover more segments, aiming to stimulate consumer spending [18][20] - Wage hikes for civil servants and increased social welfare spending are expected to support household consumption [18][24][26] Tariff Impacts - The US is expected to implement phased tariff hikes on imports from China, which could further pressure China's GDP growth and exacerbate deflation [41][43] - The potential impact of targeted tariffs could lead to a decline in real GDP growth by approximately 1 percentage point [43] Housing Market Dynamics - The housing market is undergoing significant adjustments, with investment levels now comparable to post-bubble Japan and the US [60][61] - Housing prices remain uncertain, and the outlook for housing investment is projected to contract by around -9% in 2025 [18][65] Social Dynamics and Consumption - The Social Dynamics Indicator is approaching thresholds that may trigger policy shifts towards more consumption-centric measures [38][39] - Household debt growth is slowing, indicating signs of deleveraging, which could further impact consumption [82][83] Long-term Structural Changes - China's supply chain has diversified, reducing direct exposure to the US market, which may mitigate some tariff impacts [46][48] - The government is expected to maintain a supply-centric policy framework, focusing on enhancing supply-chain self-sufficiency [68][70] Risks and Challenges - The debt-to-GDP ratio is projected to continue rising, driven by nominal GDP growth lagging behind total debt growth [84][86] - Subdued tax revenue growth poses risks to fiscal positions, with a decline of 4 percentage points since COVID-19 [90][92] Additional Important Insights - The conference highlighted the importance of decisive reflation measures to sustain stock market rallies, drawing parallels with Japan's past experiences [93][96] - The fragmented social welfare system in China remains a concern, particularly for rural residents and migrant workers, necessitating structural reforms [117][120] This summary encapsulates the critical insights from the conference call, focusing on the economic outlook, policy responses, and potential risks facing the Chinese economy.