China’s economy, recovering from the pandemic-control days of 2022, has been growing at an annual pace of 5 percent. The first three quarters registered 5.2 percent GDP growth year-on-year, and because Q4 in 2022 sets a low base (GDP growth at that time was only 2.9 percent) the current quarterly growth rate will easily hit 5 percent or even higher over Q4 in 2022, thus securing the GDP growth rate above 5 percent for the whole year of 2023 and meeting the target set by the NPC last March.
Both the International Monetary Fund and Organization for Economic Cooperation and Development (OECD) have revised China’s GDP growth rate upward to 5.4 percent for 2023. As China accounted for 17 percent of global GDP in 2022, it will, if hitting this growth rate, contribute 0.92 percentage points to world growth for 2023, estimated at 2.9 percent by both IMF and OECD — more than 30 percent of the total.
However, a growth rate above 5 percent in 2023 rides on the low base of 2022, when China’s GDP registered only 3.0 percent growth, leaving a two-year average of 4.1 percent for 2022-23 — lower than 5.2 percent for 2020-21 and over 6 percent for 2016-19.
GDP grew by 4.9 percent year-on-year during Q3 2023 — below the 5 percent benchmark— because it was on a higher base of Q3 2022 when GDP grew by 3.9 percent, making the two-year average 4.4 percent. It shows that the current Chinese economic strength is still under 5 percent annual growth for a two-year annual average. Likewise, both the IMF and OECD have estimated 2024 China GDP growth at below 5 percent.
The current Chinese economy is still in a process of repairing and moving back to the new normal baseline. If the Chinese economy, after 5 percent growth for 2023, continues to hit 5 percent in 2024, the 2023-24 two-year annual average will be 5 percent, much higher than 2022-23 average. It looks less likely at this point, because of the three existing major issues hindering more robust growth.
Three major issues
The first issues are weak demand, excess capacity and inadequate anticipation. In November, the retail volume of consumer goods increased by 10.1 percent year-on-year. While looking pretty strong, it was up against a very low base, November 2022, when it fell by 5.9 percent, for a meager two-year annual growth rate of 2.1 percent, much lower than the base trend.
The above-scale added value of industrial output grew by 6.6 percent year-on-year in November. Solar cells, power generation sets and integrated circuits increased by 56.2 percent — 28.8 percent and 27.9 percent, respectively, over a year ago. Automobile output hit 27.11 million over the first 11 months, up 10 percent from a year ago. In November alone, automobile output hit 30.9 million, up 29.4 percent year-on-year, although it was again on a low base. In November 2022, the above-scale added value of industrial output grew only 2.2 percent, leaving a two-year annual growth rate of only 4.4 percent. The industrial capacity utilization rate was only 75.6 percent during Q3 2023, compared with 78.9 percent in the United States.
The PMI in the manufacturing sector remained under 50, or in the contraction area, every month since July except September, when it scratched 50.2. The new export order PMI were all under 47 (except September at 47.8) — well in the contraction zone. Both CPI and PPI accelerated their fall in November — by 0.5 percent and 3.0 percent, respectively — reflecting continuous inadequate demand.
The second issue is the fall in the real estate sector and the increasing debt burden of local governments. China’s real estate sector, after years of rapid price increases, has been overly financialized. It has thus pulled down the purchasing power of the vast majority of households in the country and dragged the banking sector to heavy NPLs.
As a result, the real estate market has been a major negative component of the Chinese economy. During first 11 months of 2023, real estate investment fell 9.4 percent the year before, and sales were off 13.4 percent. The resulting heavy debt burden has added difficulties for developers, banks and local governments, squeezing their resources for investment.
The third issue is the deterioration of China’s import and export trade — the result of China-U.S. tensions and the trend of global geoeconomic fragmentation. Official data show that from January to November this year, 2023, China’s global trade fell 5.6 percent from a year ago, with exports off 5.2 percent and imports off 6.0 percent. The fall was particularly obvious in trade with the U.S. and European Union, with its exports to the U.S. off 13.8 percent and to the EU off 11.0 percent, twice the global fall.
This trend has been borne out by a recent UNCTAD report showing that global geoeconomic fragmentation and friend-shoring has been accelerating over the past two years. From Q1 2022 to Q3 2023, world trade increased by 6.2 percent between geographically proximate neighbors but was off 4.4 percent between distant economies and off 5.1 percent between extremely distant economies. Both the U.S. and EU are geographically distant from China and they regard each other as “proximate and friendly.” Data from the U.S. Bureau of Economic Analysis also shows this trend.
During the first 10 months of 2023, U.S. goods trade with China fell 18.3 percent from a year ago, but was up 10.0 percent with Germany, up 12.0 percent with the Netherlands and up 4.7 percent with Italy. Its advanced technology products (ATP) exports during the same period increased by 6.7 percent worldwide, but were off 10.8 percent with China, and up sharply, 27.6 percent, with the EU. U.S. ATP imports showed a similar pattern during the same period — off 0.3 percent worldwide, but off sharply, 23.0 percent, with China and up 11. 5 percent with the EU. The fall in China’s net exports contributed negatively to GDP growth for Quarters 1 to 3 this year, while contributing nearly a full percentage point to GDP growth during the first half of 2022.
There is little doubt that strong, sustainable growth in China will only be possible when the three major issues identified above are addressed and changed.
Opening-up indispensable
The recent Central Economic Conference of China has provided a clear road map and guiding policies for further economic growth through stabilization. More policies will be enacted to stabilize economic anticipation, enhance demand and reform the supply side of the economy.
Efforts will be made first to increase people’s incomes through different channels, to support improvements in their living conditions, create more jobs, encourage new-energy vehicle consumption and improve care for the elderly, all for enhancing market demand and anticipation.
Second is energetic supply-side reforms focused on high and emerging technology innovation and development. Greater emphasis on upgrading traditional industries will also be a priority. To this end, there will be a mobilization of more social investment through government investment and policy incentives, encouraging more private capital in key national projects. There will be a new round of grain output increases — 50 million metric tons — and an acceleration in the development and application of new energy, AI, bio-manufacturing, green and low-carbon approaches and quantum computing.
Third, further financial support will alleviate real estate sector difficulties, stabilize the real estate market and lower mortgage rates to help home buyers.
Fourth, there will be more fiscal policy support for the economy. Over the past year, the central government has issued 1 trillion yuan in special bonds to relieve the debt burden of local governments. It is estimated that more transfer payments will be made from the central government to the local governments, supporting local economic growth. More spending is also expected to support key investment projects. The fiscal deficit rate was around 3.8 percent in 2023, and will probably hit 4 percent or little higher in 2024.
Fifth, a firm and unswerving support of the private economy, deepening market-oriented reforms will be needed.
Sixth, high-level opening up will play a key role in China’s 2024 economy, offering more market access to foreign investors, especially in the service sector, and guarantee an open, fair and non-discriminatory treatment of all players in China, be they SOEs, private or foreign. Only in this way, can China support continuous economic recovery and growth, and secure its place in the global supply chain.
The recent San Francisco meeting between Chinese President Xi Jinping and U.S. President Joe Biden, as well as the positive action that followed, point to cautiously optimism on the China-U.S. relationship in 2024. Both sides will bring more dialogue and working group agendas to tackle together the substantive matters in bilateral relations, including trade and investment. Two-way trade, after a double-digit freefall for 11 months, has shown some signs of alleviation. The fall narrowed to single digit during August, September and October, and in November it registered a 7.3 percent gain.
It is highly anticipated that the governments and business communities of the two countries will continue to work together, maintaining and even expanding trade and investment. Following the stabilization of its relations with the U.S., China has also seen improvement in its relations with the EU, Australia and Japan. It is widely expected that with firm adherence to opening-up and perseverance in improving relations worldwide China’s external economic environment will become more favorable, thus helping to bring the Chinese economy back to a more robust track for 2024 and beyond.
