China: Aiming for a stable 2024

December 29, 2023 09:50
Photo: Xinhua

It has been about a year since China’s economy reopened. The earlier chaos caused by the COVID-19 epidemic gave way to exuberant optimism that the economy would rebound strongly. It did rebound in the first quarter, but then slipped again in the second as the property slump continued to weigh on the economy and the government did not offer much support or reassurance to the private sector. The government did eventually come around and took some incremental measures to stimulate housing demand. However, sentiment remained weak, and the government eventually opted to offer more support through a higher central government deficit and increased central bank credit to the banking system towards the end of the year.

China’s data for November continued to show uneven development. Industrial production came in higher than expected at 6.6% year on year on the back of stronger credit growth, while robust year-on-year retail sales growth was mainly due to last year’s low base and came in lower than expected. On the fixed asset investment side, manufacturing investment continued to hold up, while real estate investment remained weak. Housing starts improved from a very low base in November last year, while home sales continued to contract sharply. House prices also fell further.

China’s Central Economic Work Conference held in mid-December appeared to disappoint the market as it did not reveal any willingness to increase economic stimulus. However, the readout of the meeting revealed a number of useful policy priorities. First, the meeting acknowledges “lacklustre expectations” and makes it clear that more policies are needed to stabilize them.

Second, the meeting discussed the need for a new round of fiscal and tax reforms. As we have mentioned in the past, in order to support household consumption, China needs significant changes in its fiscal system to improve income redistribution. The readout reassures us that reforms are still under consideration, but clearly will not be finalised in the near term.

As expected, the meeting emphasised supply-side measures as the main solution to China’s current problem. Even in the strategy of expanding domestic demand, the meeting emphasised “the need to expand productive investment to create a virtuous cycle of mutual promotion between consumption and investment”. We interpret this as a green light to further invest in manufacturing capacity and expand the supply of consumer goods. Of course, this is not good news for China’s deflation. In November, Producer Price Index (PPI) growth returned to a downward trajectory and drove export prices lower. The CPI was also negative in November, largely driven by falling food prices, although service inflation remained positive. We expect PPI to remain subdued next year and possibly return to low-positive territory in the second half of 2024 due to base effects, while CPI inflation should move slightly higher as the pork cycle improves.

Third, the readout suggests that the government has changed its mind about supporting developers: “reasonable financing needs of real estate enterprises of different ownership should be met equally.” This contrasts with last year’s emphasis on “houses are for living in, not for speculation,” and “mitigating the risks of high-quality and industry-leading developers”. While this is good news, it will take more than this statement to lift sentiment that has been devastated by the 2023 defaults. We have seen a number of measures designed to help developers through banks, but in practice the banks are still reluctant to step in to support the sector. Property sales, which are still falling, could stabilise more quickly if confidence in developers improved.

The weak domestic economy is accompanied by weak employment conditions. This has essentially put a lid on household consumption. While household surveys suggest that households saved less in the third quarter, deposit data still show that excess savings since the pandemic continue to grow. Employment uncertainty is likely to keep household spending cautious in 2024, although the release of pent-up demand for travel and related services should continue. Increased government spending may improve employment conditions at the margin, but will not be able to offset the weak private sector sentiment that still prevails in sectors that have seen heavy state intervention over the past two to three years (education, internet, real estate and finance).

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Chief Economist, Head Economic Research at Bank J Safra Sarasin