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Under the Banyan Tree – China: what to watch in 2026
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Fred and Herald are joined by Chief China Economist Jing Liu to discuss the major talking points for Chinese markets and economics in the Year of the Horse.
Click here for appropriate Disclosures, including analyst certifications, and Disclaimers that must be viewed with this podcast: https://www.research.hsbc.com/R/101/xvClCkS
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Transcript
Introduction to HSBC Global Viewpoint
00:00:01
Speaker
Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends and opportunities.
00:00:13
Speaker
Make sure you're subscribed to stay up to date with new episodes. Thanks for listening. And now onto to today's show.
China's Economic Outlook Discussion Begins
00:00:23
Speaker
China Outlook intro. Herald.
00:00:29
Speaker
Three, two, one.
00:00:40
Speaker
Hello from Hong Kong and welcome to Under the Banyan Tree, where we put Asian markets and economics in context. I'm Harold van der Linde, head of Asian Equity Strategy here at HSBC.
00:00:51
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And I'm Fred Newman, chief Asia economist and not the only economist on the show today. Jing Liu, our chief China economist, is with us in the studio. She's just published her five key themes for China in 2026. We're going to ask her all about them.
00:01:05
Speaker
That's right. We're talking investment, innovation, ODI and all these sort of things. Plus, what's the outlook for housing? And is China getting closer to its aim of a unified national market? Plenty to discuss, so let's get to it. From HSBC Global Investment Research, this is Under the Banyan Tree.
00:01:28
Speaker
Fred, last year when we spoke about China, it looked like it had a really good start to the year 2025. But in the last months of the year, I remember you telling me that things started to fizzle out a little bit in China. Is 2026 going to be one of these years whereby China is, well, it's going to fizzle again, as we've seen in the past? Well, a bit in the last few years. China was always strong out of the gate in the first few quarters of the year, and then it kind of started to fizzle. And we saw that again in 2025. And the question is, will 2026 be a repeat with better numbers the beginning of the year and then a bit of a disappointment second half? And for that, we should bring in Jing Liu, chief China
Predictions for China's 2026 Growth
00:02:10
Speaker
economist. Welcome to the studio, Jing. Hello, Jing. Thank you, Fred. Thank you, Harold. Happy New Year. Happy New Year. So, Jing, give us a sense of where we're headed in terms of Chinese growth in 2026. Is there a sense that we're going to see things ramp up again and then it's going to be disappointment? How do you think about the year overall?
00:02:30
Speaker
Well, actually, our forecast is this year's growth will be a touch slower than last year, 4.6% year on year. last year So that's on average for the year. So you're saying the average year this year in 26 will be slower than actually in 25. So we are looking at an average deceleration of the Chinese economy. Yes, acknowledging ah still the challenges, particularly from domestic demand. I think the government will need to do more to tackle different kind of challenges, including... Why is that the case? So we've we've spoken quite often about the Chinese sitting on large amounts of cash, trillions of dollars in cash. So that's not really the problem, but they're not really spending something. You mean the households, the the house average person? yeah Yeah, absolutely. But they're not really spending so much. um why Why not? COVID is over. So what's what's keep them from from going out and into buying cars and refurbishing their houses or whatever they want to do?
00:03:28
Speaker
They have bought a lot of cars. but That's right. Other than that, I think um it's all about the expectation. Do they see a better future than now? Do they worry about their... ah jobs, etc. That plays a role. um I think we all notice this is already the fifth year of housing correction. And before it's stabilized, I think people will hesitate in spending in big numbers.
00:03:52
Speaker
Can I ask you on this? Because obviously consumer confidence very important. Most economies run on consumption. And if you look at some of the surveys in mainland China, you can see that households are particularly worried about the job prospects now. So it used to be that the housing market was the main worry, house prices declining. But increasingly, looks like the average consumer is worried about the jobs. Is that correct?
00:04:18
Speaker
I think that's the case from the survey.
New Job Opportunities in Tech and Services
00:04:21
Speaker
Part of the reason is still linked to the housing market because um housing and construction sector altogether has created about 70 million jobs.
00:04:32
Speaker
So if the sector continues to falter, that will have implication for ah the job market on top Yeah, but there are new. I mean, I can understand that property weak, construction is weak, but there are new industries emerging, right? It's this high-end tech and innovative sort of industries that are emerging. Isn't that – you've in the in the past also highlighted services, restaurants, travel. Wouldn't that soak up a lot of these people?
00:04:59
Speaker
I think it is starting to um pick up some steam in a sense that if those new sectors continue to prosper, it will create more and more jobs and soak up some
Challenges in Fixed Investment and Manufacturing
00:05:11
Speaker
people. But China is still in a transitional period, so it may take some time. Now, that is on the consumption side. So better employment prospects would help with consumer spending.
00:05:22
Speaker
um But you just released a report looking at five big key themes for 2026. And then one of those, you mentioned an investment rebound. And that that struck me as interesting because we're all here sitting here. Harold is dreaming of the consumer in China coming back. Maybe we're looking in the wrong corner. but Maybe we're looking wrong corner. What do you mean by the rebound in investment? What's going on there? Why do you look for a rebound in investment?
00:05:47
Speaker
Well, you may be aware that since the third quarter of last year, it's quite unusual we observe all three segments of fixed asset investment, infrastructure, manufacturing, housing, all observe year-on-year contraction. and So some people seem to be very concerned this trend will continue. Then basically the other important engine of growth will spatter again. Are you saying that that the decline in investment in the last few quarters was actually the bigger drag on growth? It wasn't consumption. It was actually the decline in investment that slowed down growth more?
00:06:24
Speaker
Indeed. That's basically what shows in the data. This is this anti-involution sort of policy that they put in place. They want companies to kind of club together A buys B and then makes a new kind of company mergers, acquisitions. Anti-involution, I think we should define that term. yeah um That's probably this government policy trying to reduce excess competition and excess capacity to reduce deflationary pressures in the economy. And that was announced last July, I think, by the president. And that may have been partly responsible for a sudden deceleration, at least in some manufacturing investment. But you're saying 2026 might actually see a bit of a rebound.
00:07:09
Speaker
Does that mean there is you know a fading interest in this policy? Oh, thank you for asking me two challenging questions. But actually, we still don't see anti-evolution campaign itself plays a major role in slowing down the investment. I would say um most of the slowdown come from the funding constraint by the local government. We basically see that ah China launched this local government debt swap.
00:07:37
Speaker
But somewhere in the middle of the year, like July or August, the quota has been run out in the sense that we have seen a slowdown in repayment of overdue bills to the real economy. And that certainly weighs on business confidence as well as the actual number. On top of that, only until end of October, I think it's fair to say,
00:08:02
Speaker
The U.S.-China relationship seem to stabilize on the trade side. So some of the business may delay their CapEx decision until they see more
Trade Tensions and Export Growth Uncertainty
00:08:13
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clarity. All those things ah seem to drag down the investment. this This is a bit of a risk, I guess, um or maybe this is already in your numbers. You've had a very strong export sector and some of the headlines that came out of China, I think in November, December, a trillion dollars surplus. surplus So that means the exports have been really strong. Fred, you've been talking about this as well. A lot of that goes into the AI boom that's taking place in other parts of the world. They need these coolers and gadgets and chips and these sort of things. But if that fizzles and you don't have that domestic investments and and consumption, then there's a problem. but are there other areas in exports where where Chinese companies can grow?
00:08:53
Speaker
So ah from China's perspective, the strong export do not only concentrate in AI and related sectors. ah We see still across the board. Chinese export being very competitive, um be it for toys, for Christmas decorations, and also some traditional sectors. So back to the question of investment, I think basically tie these two together. We don't think China will continue to grow on the export side so strongly this year. I think ah one reason is overall, there could be some payback effect. And we have also observed ah increasing trade tension with other partners, for example, EU and even ASEAN. But on the other hand, i think this is exactly why we see Chinese government basically introduced a batch of large infrastructure projects and also ah approved a front loading of the funds to make sure the investment can pick up the slack.
00:09:53
Speaker
I think this is ah ah this is an important point that we need to see a bit of an investment revival to drive growth this year. So it's not just about consumption but investment as
Government Strategies for Consumption and Housing
00:10:03
Speaker
well. But maybe this is a good point to take a quick break. And when we come back, I want to really ask you, Jing, is the government doing enough to generate that growth that people like Harold van der Linde, our equity strategist, and his colleagues are eagerly looking for?
00:10:29
Speaker
So Jing, as Fred rightly pointed out, I'm quite interested to know, are they doing enough to get investments and consumption going in China? Is there going to be growth?
00:10:40
Speaker
Well, this is not a straightforward answer. I think depending on the time horizon, if we're talking about the short term, the answer might be they're not doing enough, um as we clearly see the growth fizzles. partly because they know they can deliver the around 5% growth. But in terms of a longer term planning, I think they have done a lot. In their new five-year plan, they basically talk about they want to increase ah the share of consumption in the GDP. They also talk about area for investment.
00:11:13
Speaker
and how to basically improve the social safety net, et cetera, et cetera. So I think in a longer horizon, they have been thinking a lot and trying to do more, not just limited to whether we can deliver this year's growth or next year's. um Regarding this year, I think something very important to watch is ah back to the housing market. It's kind of rare at the beginning of the year, one of the authoritative periodical publishing article talking about improving and stabilizing housing expectation. And in particular, it calls for more policy intensity instead of ah piecemeal. That gave me hope.
00:11:55
Speaker
Maybe this year might be the year. Well, I said that for several years. After five years. I'm declining poverty prices. debt So so that that actually leads me to so my final question. um what is What would really get Jing Liu excited about Chinese growth in 2026? What news would you sort of say, if that comes in the next two weeks, I'll get up and I'm really going to be so bullish on China. What is it?
00:12:22
Speaker
Well, um I would like the central government to announce a plan to basically fix the housing market. I think now the boy is in their court. They have tried letting the local government drive the policy. That didn't seem to be very effective for obvious reasons, the budget constraint and maybe in some cases conflict of interest, etc., So if, let's say, the central government announced that we're going to look at some asset management company model, we're going to segregate the distressed assets, safeguard financial stability. At the same time, we'll put those acquired homes into use, maybe for social housing. And indeed, for China's push for urbanization, there would be good use for those
Conclusion: Investment and Housing Policy
00:13:09
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homes. Then I will be very excited.
00:13:11
Speaker
Fantastic. Well, I hope that we can get this topic then on this podcast very soon. And talk about that exciting topic. Well, I suppose the moment that news is being announced, we'll be rushing into the studio under the banyan tree and inviting you back. Jing, it's been wonderful to have you on at the beginning of the year. didn't really appreciate the fact that Investment is really the key here. That needs to reaccelerate this year. It's not just about consumption.
00:13:39
Speaker
um And yet – and we're going to look out for any policies to fix the housing market because you suggest that's the – in the short term, that could be the biggest – differentiator in terms of dialing up growth China. And maybe what you just highlighted, that there are some policy papers have come out that suggest this, that maybe something is in the making. So hopefully, it's going to be soon that we're going to have to revisit this topic on this podcast. And you will have to redraw all your Chinese equity targets if that happens. I would love to do that.
00:14:08
Speaker
Well, folks, that's a wrap for today's episode. Thank you for joining us under the banyan tree. And do give our sister podcast, The Macrobrief, a listen to. Available wherever you get your podcasts. That's right, Fred. We'll be back again next week putting Asian markets and economics in context.
00:14:24
Speaker
Talk to you then.
00:14:53
Speaker
Thank you for joining us at HSBC Global Viewpoint. We hope you enjoyed the discussion. Make sure you're subscribed to stay up to date with new episodes.