Good morning,

It has been a busy few weeks with several issues garnering investor attention. The U.S. jobs report has taken on more importance given the Federal Reserve’s admission that it is watching it more closely. Elsewhere, investors have been preoccupied with the escalating conflict in the Middle East. Meanwhile, the third quarter earnings season is nearly upon us. Below, we provide an update on China given meaningful policy announcements that were made in recent weeks.

We admittedly do not discuss China as much as we should. After all, it is the world’s second largest economy. Moreover, according to the International Monetary Fund (IMF), China is expected to account for more than 20% of global economic growth over the next few years, which is nearly twice as much as the U.S. It is also one of Europe’s biggest trade partners, and an important consumer of luxury goods. Finally, it is the world’s largest consumer of most commodities, making it relevant for Canada.

China has experienced a slowing in its growth rate over the past decade – from nearly double-digit growth to a rate that is now closer to 5% - as the country has been deliberately trying to transition its economy from one led by government investment and construction, to one driven more by its consumer. After the country curbed its pandemic restrictions in late 2022, there were high hopes for a swift economic recovery driven by Chinese consumers who would enthusiastically spend their pandemic savings, following the pattern seen in other post-pandemic economies. Moreover, the central bank did its part by lowering various policy rates. But rather than stimulate demand and loan growth, the opposite has occurred: consumers and businesses have reduced their borrowing and spending.

The weak housing market has been a big headwind. House prices have been on a downward trajectory for a few years and the country has done little to stabilize the market given their concerns over some of the excesses and an over-supply of homes that were built in the prior decade. With nearly 90% of Chinese households owning their homes, the fall in prices has left the average Chinese consumer feeling less wealthy and less confident in the outlook. It is a big reason why investors have increasingly felt that Chinese policymakers need to do more to address the depressed levels of consumer sentiment.

In the past few weeks, a series of measures have been announced: interest rate cuts, funds to support the stock market, and the lowering of downpayment requirements on homes, amongst other things. Many of these tools have been deployed before, with limited success, but what stood out this time was the sheer breadth of the actions taken. Meanwhile, there has been a notable shift in tone from senior government officials, who expressed a willingness to take more direct measures to stimulate consumer spending, business investment, and address the property market crisis. Instead of merely trying to stabilize the property market, officials announced their commitment to “halt its decline”. The stronger language raises hope the government may be prepared to undertake a bigger fiscal response in the future to deal with some of the deflationary forces that have taken hold in recent years.

Some difficult long-term headwinds for China remain: a shrinking population and a tense geopolitical climate. Nevertheless, a bigger commitment by policymakers to revive its consumer base would be a welcome development for global investors as it could provide a much-needed boost to one of the important engines of global growth.

Please continue to call us as our entire team is available to answer any questions that you may have. We can also be made available to speak with any friends or family members who made need reassurance during these times.

Have a wonderful weekend.

Devin