Zhang Ming | The outlook for China's economic growth in 2024 is worth looking forward to

Note: This article was published on China Social Science Net, December 21, 2023, please be sure to indicate the source for reprinting.

In the first three quarters of 2023, China's GDP grew by 5.2% year-on-year. The author predicts that China's GDP growth rate will be around 5.3% year-on-year in 2023. Although this growth rate is not low, since China's GDP growth rate in 2022 is only 3.0%, the higher growth rate in 2023 is achieved from a low base in 2022, and the real growth rate in 2023 is actually lower. For example, China's GDP growth rate in 2022 and 2023 will only be 4.2% on average, which is significantly lower than the potential growth rate of the economy, and there is a significant negative output gap.

Looking at the performance of the troika, consumption will perform better in 2023, but it will still be below pre-pandemic levels, and investment and export growth will be weaker in comparison. In the first three quarters of 2023, the year-on-year growth rate of total retail sales of consumer goods reached 6.8%, but the year-on-year growth rate of fixed asset investment was only 3.1%, and the year-on-year growth rate of exports was only 0.6%. Among fixed asset investment, real estate investment is a significant drag, with a year-on-year growth rate of only -9.1% in the first three quarters of 2023. From the perspective of inflation, in the first three quarters of 2023, China's CPI growth rate was 0.4% year-on-year, and the PPI growth rate was -3.1% year-on-year.

The 2023 Central Economic Work Conference made the following precise summary of the current difficulties and challenges facing China's economy: "The main reasons are insufficient effective demand, overcapacity in some industries, weak social expectations, still many risks and hidden dangers, there are blockages in the domestic circulation, and the complexity, severity and uncertainty of the external environment are rising." However, the meeting also pointed out: "The favorable conditions facing the mainland's development are stronger than the unfavorable factors, and the basic trend of economic rebound and long-term improvement has not changed, so it is necessary to strengthen confidence and confidence."

The author believes that China's economic performance in 2024 is likely to be better than in 2023, although the GDP growth rate in 24 years (expected to be around 5%) may be lower than that in 23 years, but the real economic growth and micro subjects will be significantly better than in 23 years. The author's judgment is mainly based on the following three factors.

First, judging from the monthly high-frequency data, the bottom of China's economic growth in this round will appear in July 2023, and since August, China's economic growth has continued to rebound moderately.

The year-on-year growth rate of total retail sales of consumer goods reached a year-to-date low of 2.5% in July 2023 and has rebounded to 10.1% in November. The year-on-year growth rate of exports in US dollar terms reached a year-on-year low of -14.5% in July 2023 and rebounded to 0.5% in November, marking the first time that the indicator turned positive after six consecutive months of negative growth. The year-on-year PPI growth rate reached a year-to-date low of -5.4% in June 2023 and rebounded to -3.0% in November. In addition, it is worth mentioning that the cumulative year-on-year growth rate of industrial added value of enterprises above designated size rebounded from 2.4% at the beginning of 2023 to 4.3% in November, and the cumulative year-on-year growth rate of profits of industrial enterprises rebounded from -22.9% at the beginning of 2023 to -7.8% in October. The worst performers in July 2023 were the total amount of new social financing and new RMB loans, which were only 5,366 and 36.4 billion yuan, respectively, hitting new lows in the past 10 years, and by November, these two indicators rebounded to 24,547 and 1,112 billion yuan, respectively.

Of course, there are a few numbers that have yet to rebound. The year-on-year growth rate of fixed asset investment slowed to 2.9% in November from 5.5% at the beginning of 2023. The manufacturing PMI continued to be below the boom and bust line from April to August 2023, and although it once broke through the boom and bust line in September, it was below the boom and bust line again in October and November. The year-on-year growth rate of narrow money M1 continued to decline from 6.7% in January 2023 to 1.3% in November 2023, reflecting that credit demand in the corporate sector remained weak.

One bad apple won’t spoil the whole bunch. The above analysis shows that from the perspective of short-term growth trends, the bottom of China's economic growth has appeared, and it is bottoming out in the last two quarters. It is expected that in 2024, China's economy will continue to recover spontaneously after the epidemic.

Second, around the time of the first Central Financial Work Conference, the Chinese government has begun to take a package of measures to address the financial risks inherent in the local government debt and real estate sectors.

In terms of local government debt, the Central Financial Work Conference pointed out that "establish a long-term mechanism to prevent and resolve local government debt risks, establish a government debt management mechanism compatible with high-quality development, and optimize the debt structure of central and local governments".

Since October 2023, some provinces in China have issued special refinancing bonds of nearly 1.5 trillion yuan, and the funds raised are mainly used to repay the arrears owed by local governments for repayment. The issuance of special refinancing bonds means that the prevention and resolution of local government debt has entered a new stage. In the future, the prevention and resolution of local government debt will continue to implement the principle that the provincial government bears the overall responsibility, the local government and the regulatory department bear their respective responsibilities, and the central government actively supports it. In terms of increment, the proportion of bonds issued by the central government and provincial governments will increase in the future, while the proportion of bonds issued by governments in third- and fourth-tier cities will decrease. A new round of adjustment of financial powers and powers of the central government and local governments may also be carried out in the future.

In terms of real estate, the Central Financial Work Conference pointed out that "promote a virtuous cycle of finance and real estate." Improve the main body supervision system and capital supervision of real estate enterprises, improve the macro-prudential management of real estate finance, and meet the reasonable financing needs of real estate enterprises under different ownership systems without discrimination. Implement policies according to the city, make good use of the policy toolbox, and better support the demand for rigid and improved housing. Accelerate the construction of three major projects such as affordable housing, and build a new model of real estate development".

The most pressing risk in China's real estate market in 2023 is the liquidity shortage faced by a large number of private property developers. If there is no government intervention, there may be a situation where private developers default on their collective debts or even go bankrupt and liquidated. After the Central Financial Work Conference, the People's Bank of China, the State Administration of Financial Regulation, the China Securities Regulatory Commission and the Ministry of Housing and Urban-Rural Development jointly held a meeting to solve the liquidity problem of developers. A number of leaders of financial ministries and commissions also came forward to express their stance that they should meet the reasonable financing needs of real estate enterprises under different ownership systems without discrimination. From the current point of view, the liquidity shortage of many leading high-quality private enterprises has been significantly alleviated, and the probability of collective debt default in the short term has decreased significantly. In the medium and long term, in order to fundamentally resolve the potential risks of the real estate market, it is necessary to find new power points in addition to commercial housing and build a new model of real estate development.

Third, the recent 2023 Central Economic Work Conference signaled that the Chinese government will step up its efforts to stabilize growth, which will provide policy and institutional guarantees for China's economic growth in 2024.

First of all, the Central Economic Work Conference summarized the general tone of economic work in 2024 as "seeking progress while maintaining stability, promoting stability with progress, and establishing first and then breaking", in which "promoting stability with progress" and "establishing first and then breaking" are very new terms. The so-called "promoting stability through progress" means that it is still very important to maintain a moderate and rapid growth of China's economy, which is an important prerequisite for us to solve the problem of young people's employment and resolve systemic financial risks. Based on this, the author believes that China's economic growth target for 2024 is likely to be set at 5%. The so-called "establish first and then break down" refers to the need to grasp the relationship between the new economy (e.g., the digital economy and the green economy) and the old economy (e.g., real estate and traditional infrastructure). Considering that there is still a big gap between the size of the new economy and the old economy, it is still crucial to ensure the steady development of the old economy until the new economy is fully developed and can basically replace the old economy.

Second, the Central Economic Work Conference pointed out that "the active fiscal policy should be moderately strengthened to improve quality and efficiency". In order to kick-start the economy at a time when the expectations and confidence of micro actors are still low, expansionary fiscal policy must play a more important role. In October 2023, the central government announced the issuance of an additional 1 trillion yuan of government bonds for post-disaster reconstruction, of which 500 billion yuan will be used in 2023 and 500 billion yuan in 2024. This move sends a signal to the market that China's fiscal policy may become more positive in 2024. In the author's opinion, with the above-mentioned 1 trillion national debt, the actual central fiscal deficit to GDP ratio in 2024 may exceed 4.0%, which means that the real strength of fiscal policy in 2024 will be much looser than in 2023. The fiscal policy will undoubtedly help China's economy achieve a higher level of growth.

Thirdly, the Central Economic Work Conference pointed out that "it is necessary to enhance the consistency of macroeconomic policy orientation, strengthen the coordination and cooperation of fiscal, monetary, employment, industrial, regional, scientific and technological, environmental protection and other policies, and include non-economic policies in the consistency assessment of macroeconomic policy orientation". In the past, there have been many inconsistencies between macroeconomic policies such as fiscal and monetary policies, or between macroeconomic policies and policies on land, environmental protection, and government debt management. The latest statement of the Central Economic Work Conference on the consistency of policy orientations means that policy orientations will be coordinated and unified, so that local governments can focus more on the core task of stabilizing growth and promoting development. After all, "high-quality development is the last word in the new era" and "promoting Chinese-style modernization is the biggest politics".

To sum up, China's macroeconomic growth is in the process of self-repair, the Chinese government is introducing a package of policies to prevent and resolve systemic financial risks, and the Central Economic Work Conference has released a signal to increase efforts to stabilize growth and promote development, in summary, the author believes that China's economic growth in 2024 will be significantly better than in 2023, and the gap between the feelings of micro subjects such as households and enterprises and macroeconomic growth is also expected to be significantly narrowed in 2024. China's GDP growth is expected to reach 5.0% and CPI growth is expected to reach 2.0% in 2024.