In 2023, why is there no V-shaped reversal in China's economy?

In light of the actual situation, efforts should be made in three aspects in 2024: focusing on improving the overall quality of the labor force to avoid the rapid decline of the labor force, adhering to innovation-driven efforts to promote the improvement of labor productivity and total factor productivity, and improving the efficiency of capital formation

Caijing reporter Zou Biying Special writer Sun Dongwei Xi student Wang Meilin

Edit | Wang Yanchun

China's economic growth in 2023 is basically in line with expectations, but the two-year average growth rate is around 4.1%, showing a weak recovery overall. After the third quarter, macro policies began to exert force, counter-cyclical control policies have increased significantly, and it is expected that the recovery trend will continue in the fourth quarter. Recently, the Bank of China Research Institute released the "China Economic and Financial Outlook Report" (hereinafter referred to as the "Report"). The report predicts that China's GDP (gross domestic product) will grow by about 5.3% in 2023 and about 5% in 2024.

Zhou Jingtong, vice president of the Bank of China Research Institute, said at the media conference that released the report,

In 2023, China's economy will show four major changes, namely: the growth momentum will change from investment to consumption, the export momentum will change from traditional commodities to emerging markets, and the importance of emerging economies will increase, the production momentum on the supply side will shift to the service industry, and the driving force of new energy and information technology will be strong.

Liang Jing, a researcher at the Bank of China Research Institute, responded that the relationship between supply and demand in the real estate market has undergone major changes in recent years, and despite the introduction of policies, the market is expected to be difficult to reverse in the short term. Weakening international demand also has an impact on the export economy. In the first three quarters of this year, the policy strength was relatively conservative than expected. The three-year pandemic has traumatized China's economy, and it will take time for business operations, residents' employment, and incomes to improve.

How to judge the economic recovery in 2023?

The global economic recovery is weak, and the Bank of China Research Institute predicts that global GDP growth will be 2.7% in 2023. Zhou Jingtong introduced that compared with 2022, a significant change in the mainland economy in 2023 is that the contribution rate of consumption to economic growth has increased significantly, the contribution rate of net exports to economic growth has turned from positive to negative, and the contribution rate of capital formation to economic growth has decreased significantly.

According to the report, in the first three quarters of this year, consumption contributed 83.2% to economic growth, driving GDP growth by 4.4 percentage points, even higher than the pre-pandemic level in 2017-2019 (59.5%). From January to October, retail sales of services increased by 19% year-on-year, significantly higher than the growth rate of retail sales of goods (5.6%). Tourism, catering, entertainment and other sectors performed strongly. However, the high growth of consumption in 2023 is based on the low base of the previous year, and the overall consumption will still show a weak recovery after excluding the base effect.

Cost-effective products are more popular. In 2023, Luckin Coffee will surpass Starbucks and become the No. 1 brand in China's coffee market share. And the enthusiasm for buying luxury goods has declined. In the third quarter of this year, the sales growth rate of LVMH Group and Kering Group (Gucci's parent company) in the Asia-Pacific (excluding Japan) region was 11% and 1% year-on-year, respectively, which was the lowest point in the past three years.

Liang Jing pointed out that in the first year after the three-year new crown epidemic, the problem of insufficient demand was more prominent. In the first 11 months of the year, exports fell by 5.2% (in dollar terms). The real estate market is still adjusting, and the effect of a series of policies introduced is still relatively limited, and the market is expected to be difficult to reverse in the short term, and the land market, real estate sales, and investment are still declining.

According to the report, in the first three quarters of this year, the contribution rate of net exports to GDP turned negative, -13%. Emerging markets are growing in importance. In the first three quarters of 2023, among China's top 20 export trading partners, the share of emerging economies in China's exports increased from an average of 27.8% in 2013-2022 to 34.3%. Among them, the growth rate of China's exports to emerging markets such as ASEAN, Russia, Africa and Latin America was -5.3%, 52.2%, 8% and -3.9% respectively, which was better than the overall growth rate of exports.

The export structure of products is also changing. The report pointed out that in the first three quarters of this year, electronic components became China's largest export commodity category. The "new three" has become a new driving force for export growth, with a cumulative year-on-year increase of 30.5% in the first three quarters, much higher than the overall growth rate of exports. It is worth noting that for the first time, cultural products entered the top 10 of China's export commodities.

For investment, Liao Shuping, a senior researcher at the Bank of China, said that in 2023, global FDI (international direct investment) will still decline, but the narrowing will be lower than last year. Global FDI fell by 12% last year, and global M&A deals remain weak this year due to geopolitical tensions, changes in the financial sector and tighter investment scrutiny.

Data released by the National Bureau of Statistics on December 15 showed that from January to November, the country's fixed asset investment increased by 2.9% year-on-year. By sector, infrastructure investment increased by 5.8 percent year-on-year, manufacturing investment increased by 6.3 percent, and real estate development investment decreased by 9.4 percent. Private investment decreased by 0.5 percent, while excluding investment in real estate development, increased by 9.1 percent year-on-year.

The report pointed out that due to the downturn in the real estate market, real estate investment continued to decline, and the increase in local fiscal pressure restricted the growth of infrastructure investment, and the role of investment in driving economic growth weakened. Liang Jing said that before breaking the past "three highs" real estate development model and establishing a new development model, it is necessary to continue to optimize and adjust relevant policies, support the resolution of real estate enterprise risks, ensure the expected repair and improvement, and ensure that the market has a stable transition.

Zhou Jingtong commented that the service industry contributed 63% to economic growth in the first three quarters, and consumption and the service industry are important supports for economic growth in 2023. The driving force for the transformation and upgrading of industrial structure such as new energy and information technology is also relatively strong. However, the consumption of social goods is still relatively weak. Against this backdrop, the pace of economic recovery in 2023 will be relatively modest.

Investment, exports, and consumption outlook for 2024

Zhou Jingtong said that the monetary policy of developed countries may shift, which is relatively favorable to emerging economies. China and the United States may enter the replenishment cycle at the same time, which will bring benefits to mainland exports. The domestic policy of stabilizing growth will continue to exert force, and domestic demand will be further stabilized. It is expected that the mainland's GDP growth rate will be about 5% in 2024, and the actual economic prosperity will be better than in 2023.

The report points out that in 2024, infrastructure and manufacturing investment is expected to grow rapidly. The additional 1 trillion yuan of treasury bonds issued by the central government in 2023 will form a physical workload in 2024. In November 2023, the "Guiding Opinions on Standardizing the Implementation of the New Mechanism for Public-Private Partnership" was issued, which also indicates that PPP projects that were suspended in February 2023 will restart. At the same time, it is necessary to do a good job in advance to improve the relevant project reserves to avoid the phenomenon of "project shortage" and "ineffective construction".

The report predicts that the growth rate of fixed asset investment in 2024 will be about 4.5%, and the investment in real estate development will decline by about 7%. As of October 2023, the area of commercial housing for sale in the country has increased by 648 million square meters, and the difficulty of destocking commercial housing is still increasing. If market demand is difficult to improve, it may exacerbate the oversupply situation and lead to a further decline in house prices. In 2024, the real estate regulation policy will continue to be optimized, promote the resolution of risks in the real estate industry, and release reasonable housing demand.

According to the analysis of the report, in 2024, most industries in the United States will soon enter the inventory replenishment cycle, and the import demand for consumer electronics, furniture and building materials, food and agricultural products, textiles and garments and other goods may expand, which will help boost China's exports. Although the interest rate hike cycle in Europe and the United States is coming to an end, the interest rate level is still in the historically high range, and the inhibitory effect on private consumption and corporate investment will continue. From the perspective of export destinations, it is expected that exports to the United States are expected to improve, exports to Europe may remain stable, and exports to emerging economies are still an important support. China's exports are expected to increase by about 2% year-on-year in 2024.

Liang Jing believes that to increase consumption in the future, the first is to ensure sustained economic growth and the stable recovery of employment. Second, it is necessary to improve the social security system, especially in some cities, and reduce the pressure on residents' lives through the construction of affordable housing. The third is to optimize consumption and supply. For example, improve the construction of parking lots and the layout of charging networks to better release the potential of automobile consumption. The Bank of China Research Institute expects China's consumption to grow at around 6% in 2024, which will be lower than in 2023 (about 7.6%).

In addition, since the middle of this year, there has been a lot of controversy about whether deflation is occurring in China. According to data released by the National Bureau of Statistics, in November, the national consumer price (CPI) fell by 0.5% year-on-year, the third negative monthly growth in 2023. The Bank of China Research Institute predicts that the PPI will gradually recover in 2024, and is expected to turn from negative to positive around the third quarter, with an annual increase of about 0.4%, and the annual increase of CPI will be about 1.1%, which will not be in the negative growth range or deflationary range.

Liang Jing believes that there are several important directions in the future: First, strengthen scientific and technological innovation and increase research and development, especially basic research and development. The second is to promote the transformation of scientific research achievements, and grasp the current new generation of information technology and the key development trend of green development. Third, it is necessary to properly handle the relationship between the government and the market, especially in the development of scientific and technological innovation, in addition to the national system to promote breakthroughs in some common key technologies, the market needs to play an important role in improving the efficiency of resource allocation. Fourth, we must persist in opening up.

The deficit rate may exceed 3%, and the need for monetary easing will decrease

Liao Shuping said that the global economic differentiation will intensify, and the global GDP growth rate next year will be about 2.5 percent, down 0.2 percentage points from this year; and with the Federal Reserve stopping interest rate hikes, the depreciation of the US dollar, and the decline in US Treasury yields, the tendency of international capital to flow out of the United States has increased, and it will flow to emerging economies.

For China's macro policy in 2024, Zhou Jingtong predicts that the deficit rate may exceed 3% in 2024, such as about 3.5%. The report points out that the central government's leverage ratio is larger, and more fiscal funds will be tilted towards people's livelihood, science and technology, green and other fields, and promote the implementation of a package of debt solutions to balance the relationship between stable growth, promoting reform and risk prevention.

The report predicts that the fiscal balance will remain tight in 2024. Fiscal expenditure also needs to increase financial investment in medical care, education, social security, and other aspects. Improve childbirth support measures, and create a more convenient environment and conditions for children to go to nursery and school. Comprehensive use of financial subsidies, tax incentives and other measures to ensure the development of strategic emerging industries.

Zhou Jingtong pointed out that first of all, it is necessary to ensure that China's economic operation continues to recover and put it on a normal track, including the stabilization of the real estate market. Second, we can consider appropriately increasing the central government's debt and redistributing it to the local government. Third, it is necessary to strictly enforce fiscal discipline and continue to push forward the work of "opening the front door and closing the back door." Over the years, local debts have been turned into three rounds, but after one round of debt, the debt problem has become prominent again. Fourth, we should restart a new round of reform of the fiscal and taxation system, and strive for a better match between the central and local powers and financial powers.

The report also pointed out that consideration should be given to appropriately increasing the proportion of profits handed over by state-owned enterprises and actively revitalizing existing assets to increase revenue.

Regarding monetary policy, Li Peijia, a researcher at the Bank of China Research Institute, said that in 2024, the need for monetary easing will further decline, and it is necessary to balance the relationship between "stabilizing growth", "promoting reform" and "preventing risks". However, from the perspective of risk prevention, next year is still an important period for the resolution of risks such as local government debt and real estate, and it is indeed necessary to further reduce interest rates in order to help reduce debt costs and better support economic development. But it also called for creating conditions for banks to reduce the cost of debt.

It is predicted that in 2024, while the policy rate will remain at its current level, the deposit rate may be lowered.

According to the estimation of the Bank of China Research Institute, China's potential economic growth rate from 2021 to 2025 is 5%-5.5%, and the potential economic growth rate from 2021 to 2035 is 4.3%-4.4%, and it is slowing down year by year. Problems such as labor shortage, slowing down the rate of human capital accumulation, declining physical capital formation rate, and slowing down the growth rate of total factor productivity may persist.

The report points out that the potential growth rate is not an inevitable consequence of the actual performance of economic growth. In the future, in light of China's actual situation, efforts should be made in three aspects: First, efforts should be made to improve the overall quality of the labor force and avoid the rapid decline of the labor force. The second is to adhere to innovation-driven and promote the improvement of labor productivity and total factor productivity. The third is to improve the efficiency of capital formation.

Editor-in-charge | Zhang Yufei

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