China: Excess liquidity tailwinds, waiting for more housing/consumer stimulus

Chinese assets continue to benefit from liquidity tailwinds. Claims on non-bank financial institutions – our proxy for shadow banking – is still growing. Meanwhile, M2 growth is also starting to pick up relative to nominal GDP growth, showing that the previous cuts to the reserve requirement ratio are starting to feed through.

The next catalyst for China will be the Fourth Plenum to be held between October 20-23. The key remains to see how policymakers’ attitudes towards domestic consumption is shifting.

It will be very hard to get a sustained reflation in the Chinese economy without addressing the weakness in housing and consumer sentiment. House prices have been falling since 2021 and are still falling. Alongside the weak jobs market, this has weighed heavily on consumer sentiment. Consumers are still heavily biased towards more saving than consumption.