China’s 5.2 per cent rise in gross domestic product (GDP) last year, despite beating its annual target and still well outpacing growth in developed Western countries, has yet to convince the market that all is well in the world’s second-largest economy, according to observers.
And the race is on as policymakers grapple with the ramifications of four distressing “D’s” – debt, deflation, de-risking and demographics – that continue to bog down the 126-trillion-yuan (US$17.67 trillion) economy at the starting blocks of 2024.
The race of key industries against plunging property
Real estate, along with related sectors dealing in home appliances, construction and materials, used to account for about a quarter of China’s economic output. But the pillar industry fell fast in recent years, as evidenced by the debt crises at major property developers such as Evergrande and Country Garden, which owe millions to small companies and their workers.
China’s property-development investments slumped 9.6 per cent last year, with the total area under construction dropping by 1.5 per cent and total sales falling 6.5 per cent to 11.66 trillion yuan.
The added value of the real estate sector accounted for 5.8 per cent of the national GDP last year – a years-low, according to government data.
“China is seeing a dual-track recovery,” said Yu Xiangrong, Citigroup’s chief Greater China economist, at a webinar this month.
And he suggests that the contributions of three new powerhouses – technological innovation, advanced manufacturing and modernised infrastructure – could approximate that of the property sector. But for the pivot to a new growth model to take place, both the supply and demand sides would have to contend with “throes of a deep, profound change and transition”, he warns.
The race of policy action against weak momentum
Beijing has maintained a policy-loosening stance, but no “bazooka-style” stimulus is expected in 2024.
Authorities have taken a variety of policy support steps since last summer, including an action plan for private and foreign investors, followed by the approval of 1 trillion yuan worth of special treasury bonds in October. These measures, however, have not yet translated into sustainable growth momentum.
Sequential economic growth slowed to 1 per cent in the fourth quarter of 2023 from 1.5 per cent in the third quarter, according to the National Bureau of Statistics (NBS).
Despite a push among local authorities to get their respective economies off to a strong economic start, many analysts expected a step-by-step easing approach because of debt and risk considerations.
“Policy is moving slowly in this direction and will continue to edge closer,” wrote Rory Green, an economist at market-research firm TS Lombard. “There will be no bazooka, but a steady drip feed of increased bond issuance and PSL (pledged supplementary lending) will build through the year.”
The [Chinese] economy can’t afford successive years of a confidence crisis
Xu Tianchen, the Economist Intelligence Unit
The race of business against faltering confidence
Beijing has talked a lot about supporting private firms and welcoming foreign investors – with the latest comments coming days ago from Premier Li Qiang at the World Economic Forum in Davos, Switzerland.
However, the latest NBS data indicates private investment fell by 0.4 per cent last year. Meanwhile, China’s foreign direct investment (FDI) totalled 1.1 trillion yuan in 2023 – down 8 per cent, year on year – according to commerce authorities. FDI to the manufacturing sector dipped 1.8 per cent while those to the service sector slumped 13.4 per cent.
Analysts have warned that the government must make its messages more transparent and its actions more assertive.
“The [Chinese] economy can’t afford successive years of a confidence crisis,” said Xu Tianchen, senior economist at the Economist Intelligence Unit.
The delay of the Third Plenum, an occasion for the Communist Party leadership to address the nation’s long-term economic issues, also raised concerns about China’s policy direction.
Debt burden weighs on local authorities and developers
Local authorities across the country are now besieged by debt – a situation that worsened amid falling tax revenue and declining land sales in the first year of China’s post-pandemic recovery.
The confirmed local debt amounted to 40.6 trillion yuan at the end of November, up 16 per cent, year on year, according to the Ministry of Finance.
Meanwhile, the total debt size of local government financing vehicles was between 55 trillion and 65 trillion yuan in the third quarter of last year, according to Mizuho Securities Asia.
Developers are now in survival mode, awaiting government funding to lift them out of the financial doldrums. Over the past two years, around 50 mainland developers have defaulted on about US$100 billion worth of offshore bonds, according to a JPMorgan report in December.
Deflation fears must scare up support
China’s consumer price index fell in December by 0.3 per cent, year on year, marking a third consecutive monthly decline. Upstream deflation pressure is more pronounced, as the producer price index fell for the 15th consecutive month in December and dropped by 2.7 per cent, year on year. Fears are intensifying that China may slip into a Japan-like spiral of stagnation.
The deflationary pressure highlights the stubborn problem of inadequate domestic demand, which has worsened amid falling export orders.
Yao Yang, director of Peking University’s National School of Development, said the deflationary pressure – despite monetary easing – means that the insufficient-demand problem remains severe, coupled with a supply-demand imbalance.
The economist has called for demand-side reforms, such as direct subsidies to consumers, to boost demand, which had “nearly zero growth in the past three years”, he said at a seminar in Guangzhou last week.
De-risking set to accelerate
Speaking at a high-level financial conference on Tuesday, President Xi Jinping said China faces urgent tasks in its efforts to tackle various financial risks, and he ordered regulators to clarify their responsibilities and join hands in the nation’s de-risking campaign.
“Financial regulation must have teeth,” he said. “All localities must plan for the overall situation based on one region and practise risk management and stability maintenance.”
Beijing set up the Central Financial Commission in March as part of a financial overhaul to clamp down on risks.
Preventing and resolving such financial risks is an “eternal theme” for the central government, according to comments that came from the twice-a-decade central financial work conference in late October.
Demographic woes intensify
The decline in China’s birth rate has accelerated rapidly, with its population shrinking by 2.08 million to 1.4097 billion last year, much steeper than 2022’s alarm-raising decrease of 850,000, which marked the first decline in six decades.
Births in China dropped by 5.6 per cent to an all-time low of 9 million in 2023, after having already lost the title of the world’s most populous nation to India, according to United Nations data.
Meanwhile, about 11 million Chinese people died in 2023, pushing the death rate to a five-decade high.
The birth decline worsened despite Beijing effectively scrapping all birth-control rules and doling out pro-natal support in recent years for couples to raise bigger families.
The knock-on effects of a shrinking population that is rapidly ageing means the nation’s long-touted demographic dividend has whittled away. And this is expected to have far-reaching implications for the labour supply, consumption, social security benefits and economic growth prospects for years to come.
News Related