China’s fragile economy appears destined to remain on a precarious course through 2024 as structural issues hinder growth. Beijing’s decision to open up the economy following one year of zero COVID restrictions has done little to alter this pattern.
Private investment has ground to a halt and household consumption has become stagnant as confidence fades, while youth unemployment has reached record highs.
1. China’s economic slowdown
China was known to experience annual economic growth of 9 percent or greater for decades and lifted 800 million people out of poverty. Yet its economy has slowed sharply this year and consumer prices are falling rapidly – raising concerns of deflation and dampening business confidence while placing local governments under strain and prompting them to reduce social services as needed to cover shortfalls in revenue.
Qazi asserts that China has entered an irreversible slowdown from which it may never recover, despite Beijing’s traditional playbook of increased stimulus measures such as debt relief or real estate market stabilization efforts. Rising household debt levels, real estate crises, and falling land sales revenues (the main source of local government income) will thwart efforts to revitalize growth.
Beijing must decide whether its current strategy of seeking stability at any cost should change in order to dispel economic gloom and boost demand through increased investments. If it does so, this could open up new economic possibilities that may alleviate stagnation.
2. Deflation
China’s slowing economy is placing strain on its already high debts. This could potentially trigger a deflationary spiral as falling prices lower production and reduce savings – leading to further borrowing and demand drops.
The textbook response to falling prices is stimulus, yet China has taken an unconventional path this year. They have only modestly reduced policy interest rates while capital outflows have reduced their ability to take bold actions.
Household demand has been dampened as property markets decline further, exacerbating local government financial stress that spreads throughout the wider economy and diminishing consumer trust. The government is taking measures to support growth by running larger deficits and encouraging banks to refinance local government debt at favorable terms, signaling Beijing is shifting away from long-held fiscal conservatism; yet efforts so far have not succeeded in reinvigorating demand.
3. Real estate crisis
China’s property sector had long been seen as the primary driver of economic expansion. Unfortunately, heavy debt and numerous defaults triggered by government crackdowns on speculative lending have caused sales of home to plummet while developers scramble for cash; this has undermined an otherwise robust pillar of growth – further diminishing local governments revenues and upstream suppliers’ trust.
Natixis analyst Ng predicts that in 2024 housing sales in China’s top-tier cities will decline further; however, state-backed developers will avoid bankruptcy thanks to their diversified business models and access to funds, according to Natixis’s Ng. On the other hand, second-tier cities face greater uncertainty as buyers migrate downmarket; large private developers such as Evergrande and Country Garden may have trouble meeting debt interest payments as buyers shift to lower tier cities.
Manufacturing may provide some support, but any single sector alone won’t be enough to counter China’s broad slowdown. Without major market reforms happening, China could easily fall into what economists refer to as “The Middle Income Trap,” whereby emerging economies grow quickly until reaching middle income status and then stagnate once reached.
4. Foreign investors’ fatigue
Beijing’s efforts to lure back foreign investment may come under strain in 2024. Foreign executives may have become fatigued with China’s repeated assurances of transparency, equal treatment and fairness while its global economic outlook weakens business trust in its investment climate.
Domestic demand will likely remain limited by weak property sector growth and consumption may rise from its deep slump this year; nevertheless, without recovery of the property market business fixed asset investments may remain weak according to Bloomberg Economics.
Given that monetary stimulus may not offer much relief, fiscal stimulus could play a larger role next year. Beijing plans on running a headline fiscal deficit of 3 percent or greater of GDP through bond issuance – marking a shift for Beijing which has traditionally avoided running large deficits; though such change may only last temporarily if recovery does not materialize soon enough.
