China economy in 2024

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CHINA STEPPING INTO 2024 WITH CONFIDENCE AND STRENGTH

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INTRODUCTION

For decades since China re-opened to the world in 1978, it was one of the fastest growing major economies on Earth. Between 1991 and 2011, it grew by 10.5% annually.?The expansion has slowed during Chinese leader Xi Jinping’s rule, but was still averaging 6.7% in the decade through 2021.“The second half of the 2020s will … see slowing growth,” Scissors said, citing a correction in the troubled real estate sector coupled with demographic decline. The IMF has also become gloomier about the longer-term outlook. In November, it said it expected China’s growth rate to reach 5.4% in 2023, and gradually decline to 3.5% in 2028 amid headwinds ranging from weak productivity to an ageing population.

Over the course of 2023, the real estate sector crash dominated headlines as other mega developers including Country Garden struggled with ballooning debt and began missing payments, and financial institutions such as Zhongzhi Enterprise Group have reckoned with insolvency. As developers ran out of money, projects were halted, giving rise to “ghost” developments, and not just in China — such as with Country Garden’s Forest City in Malaysia. Some 20 million presold apartments in China are unfinished, according to a Nomura analysis published in November.

China’s economy had a miserable year. 2024 might be even worse. In 2023, the Chinese economy showed signs of wavering as several obstacles came home to stay. Even though this all cropped up in the face of what was meant to be an upbeat post-pandemic period for the world’s No. 2 economy. ?China expected with implemented some of the harshest pandemic controls in the world, would swing into growth mode, but instead its economy has been stirred by a spiralling real estate crisis, sinking consumer confidence, deflation, mounting youth unemployment and the disappearance of foreign investment. Such innumerable problems will need a focussed policy response, and officials have specified that they intend to support the economy overall by addressing underlying systemic issues, such as the property crisis, and pushing for increased consumption. December’s Central Economic Work Conference — considered an economic policy bellwether — referenced a number of economic challenges and a need for further reforms in the new year, but emphasized “progress while ensuring stability. “However one slices the data, the existing excess supply in the market is likely to take at least another four years to unwind. ... Increasing supply coming from secondary market transactions — as households, worried about depleting profits from price declines, sell their second or third homes — is an additional drag to this process,” Louise Loo, the advisory firm’s lead economist, wrote in a December report.

While publicly there is optimism and the projection of confidence — backed by a stated intent to reinforce foreign trade, curtail real estate risks and improve state-owned enterprises’ competitiveness — there are still many questions about how policy will outline. Customers inside a Haidilao hotpot restaurant in Shanghai underlying issues such as high youth unemployment and a limited social safety net have contributed to people holding onto savings and minimizing their spending. Still, the International Monetary Fund expects the Chinese economy to have grown by 5.4% in 2023 — up from an earlier 5.0% estimate — and 4.6% in 2024, also an increase from its previous projection. But there are concerns about China’s current economic model and whether it has run its course. The answers to those will have major consequences not just for Chinese society, but also the copious countries that have deep trade links with China. Tao Wang of UBS outlines three main themes for China's economy in 2024: property stabilization, debt restructuring, and economic transition.

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“While there is some truth to this, we think that officials are underestimating the extent to which China’s slowdown is structural in nature and wont be so easily reversed.” “Most of the slowdown reflects a structural decline in productivity and income growth, rather than cyclical weakness that can be addressed through demand-side stimulus or other confidence-boosting measures,” he said .If Beijing resorts to its old playbook, such as greater borrowing, it could still spur growth in 2024, but only?as “an economic pain-killer, not a cure,” according to Scissors.

China’s leadership, which gathered this month to discuss economic targets and policies for next year, has indicated that it will incline? fiscal and monetary support for the economy. Officials have even pledged to strengthen “economic propaganda” and “public opinion guidance” in a bid to boost confidence. Chinese media have reported that the government may set next year’s economic target again at around 5%, which seems ambitious when compared with independent forecasts.?The?official?target will be announced in March, when China holds its annual legislative meetings. But the moves aren’t likely to help fix the structural problems. “Policymakers seem to believe that with a bit of stimulus and a turnaround in sentiment, the economy can get back on a stronger path,” said Julian Evans-Pritchard, head of China Economics at Capital Economics. He said officials also appear to be hoping that setting an ambitious growth target can help bolster confidence.

Here is at some of the trends that will shape the Chinese economy in 2024:

REAL ESTATE

With China’s residential property sector estimated to contribute around 30% of gross domestic product, and with 70% of household wealth tied up in housing, the impact of real estate’s struggles is significant. The origins of China’s property market woes reach back to 2020 after the introduction of the “three red lines” policy aimed to slow down the sector and curb swelling developer debt. This was rolled out amid concern that the sector was in danger of witnessing a bubble. But soon after its introduction, developers began facing financing issues, particularly Ever Grande, which in December 2021 defaulted on $300 billion in debt and has since filed for bankruptcy protection. It is the world’s most indebted property developer.

The Japan Center for Economic Research said in December that China could face zero growth in 2027 if the real estate bubble bursts. While official stats paint a picture of a sturdy property market in Beijing, reports have emerged of house sellers in the city cutting prices amid caution by buyers and a decline in property investment. In an attempt to mitigate this, regulators have rolled out a series of measures this year to support the sector's recovery — including easing mortgage policies and past restrictions. But Oxford Economics expects the issue to drag on for years, given the volume of unfinished homes. And underlying challenges such as a decline in the main demographic that makes primary home purchases — those between the ages of 30 and 34 — mean the issue is likely to persist.? Meanwhile, local governments also face dwindling income from land sales, adding to pandemic-induced financial pressure. In December, credit agency Moody’s downgraded its outlook for China’s credit rating from stable to negative. While the group retained China’s A1 rating, meaning there is a low credit risk, it nonetheless noted that the need for bailouts and government support could weigh on the country’s economic strength. In addition, various sectors are connected to real estate and will experience knock-on effects, while there have already been widespread layoffs in the property sector.

Foreign investment

Following a highly publicized crackdown in the tech sector and stringent pandemic controls that disrupted businesses and supply chains, the allure of China has waned for some firms and investors. While earlier this year officials spoke of a more “open” China following the end of pandemic controls, underlying geopolitical tensions and resulting uncertainties have made this a harder sell. Foreign firms have increasingly sought to hedge their bets, with foreign investment in China turning negative in 2023 for the first time since records began as companies shifted money away from their China operations. Companies have continued to diversify their supply chains — a trend that has been going on for a number of years but which was accelerated by the pandemic — both for practical reasons and as a means of circumventing geopolitical tensions. As a result, the U.S. is now trading more with countries closer to home. While officials have called for more foreign businesses and investors, this has proven challenging: Efforts to reverse the trend have been met with “promise fatigue,” Tianlei Huang and Mary E. Lovely of the Peterson Institute for International Economics (PIIE) wrote in a December blog post, as companies “remain skeptical that the authority’s supportive rhetoric will actually translate into meaningful policy actions.”

Consumer confidence

Underlying issues such as high youth unemployment and a limited social safety net have contributed to people holding onto savings and minimizing their spending, with consumer confidence slumping to historic lows, save for a bump in early 2023, according to OECD data. This is particularly troubling because of the contribution that consumption now makes to the economy. In 2021, consumption expenditure contributed 65.4% to growth and boosted the growth rate by 5.3%, according to a Deloitte report on Chinese consumers published last year. While retail sales grew in November, reaching 10.1% from a year earlier, the figure was lower than the 12.5% analysts had estimated given the low base in 2022.

And during that month’s Singles Day — the local equivalent of Black Friday, which has traditionally spelled a large payday for retailers — close to half of those shoppers planned to opt for cheaper brands or switch to private-label products, Bain and Company research found. Cranes at the container terminal at Nanjing port, in China's eastern Jiangsu province answers to the economic questions being posed of China will have ramifications for the numerous countries that have deep trade links with the country. Consumer confidence also shows the myriad ways the property crisis can affect other parts of the economy: With real estate no longer viewed as a viable option, would-be investors are holding onto cash, or buying overseas in countries including Japan. Also weighing on confidence is the issue of youth unemployment — which reached 21% in June, before Beijing halted the reporting of these figures. Against this backdrop, educated graduates are taking low-paying jobs or experiencing wage cuts.

Deflation

Intersecting with these issues is the deflationary trend that has overtaken the economy, in contrast with the situation worldwide. The consumer price index for November fell 0.5% from a year before and the month prior — with the year-on-year decline being the fastest in three years — amid weakening demand, according to figures released in December. Disinflation began to take hold in February, before inflation turned negative in July. Inflation returned for the following two months, only to fall below zero again in October. “A deflationary spiral would lead to lower production, falling wages, and rising unemployment. Even now, rising deflationary pressures are pushing up real borrowing costs, adding to the country’s already high debt burden,” Huang and Lovely of the PIIE wrote.

The threat of deflation, combined with the real estate crisis in particular, has prompted talk of the “Japanification” of China’s economy, with many drawing comparisons to the bursting of Japan’s economic bubble in the early 1990s and the resulting “lost decades.”

UBS predicts China's economy will grow by?4.4%?in 2024, with a stabilized real estate market and increased infrastructure investment. 2024 is upon us, and its emerging outline is worth looking forward to. Meanwhile, 2023 come to an end, and its ups and downs have filled us with loads of emotions. People have gained a deeper understanding and more experiences with major changes unseen in a century that are evolving faster: from the prolonged Russia-Ukraine conflict to the new round of the Palestine-Israel conflict; from the historic expansion of the BRICS to the strong rise of the concept of the "Global South" in international politics; from the global AI wave led by ChatGPT to the historic agreement reached at the COP28 to "move away from fossil fuels." It is expected that 2024 will not be another "year of mediocrity." According to incomplete statistics, in 2024, 76 countries and regions around the world will hold general elections, and more than 100 election campaigns will take place, covering more than half of the global population. This may mean more uncertainty and even the possibility of unexpected conflict and unrest. At the same time, it is still unknown if the Russia-Ukraine conflict and the Palestine-Israel conflict can end next year, while the risk of geo-economic fragmentation, the "decoupling" and "de-risking" will bring more uncertainty to the global economic recovery process. However, whether it is 2023 full of changes and turmoil, or 2024, which may be an even more volatile year, we can still see some of the basic veins of the direction of history behind the changes and uncertainties. Although the great adjustment of the international landscape is still underway, and the intensity of the great power game will increase, the trend of the international landscape moving toward multipolarity in general has strengthened rather than weakened over the past year, and the driving force has increased rather than decreased. Although some countries have been enhancing trade-restrictive measures, and economic globalization has a tendency to slip into the wrong path of pan-politicization, pan-securitization and alignment, the market logic of win-win cooperation is still dominant, and the stabilization and preservation of coupling still have the upper hand in terms of strength and morality. In particular, in response to a series of major problems and challenges facing the world today, China advocates equal and orderly multipolarity as well as inclusive economic globalization and has always stood on the right side of history. In 2023, China's economy has withstood external pressures and overcome internal difficulties, with high-quality development being advanced solidly and a firm step forward taken in building a great modern socialist country in all respects. Perhaps there is a gap between the actual outcomes of 2023 on one side and the expectations of some people at the beginning of this year and some people's personal feelings on the other. But it must be seen that China's development is faced with more favourable conditions than unfavourable ones, and that the basic trend of the Chinese economy's rebound and improvement and China's sound economic growth in the long run will remain unchanged. This gives us more confidence and strength to move forward. Such confidence and strength stem from the accelerated progress of China's high-level opening-up. In 2023, China responded to the US' "small yard, high fence" with a higher level of openness, from the third Belt and Road Forum for International Cooperation to large-scale events including the Canton Fair, China International Import Expo, China International Fair for Trade in Services, China International Consumer Products Expo, the Global Digital Trade Expo, and the China International Supply Chain Expo. This pattern is expected to persist and expand in 2024. Such confidence and strength stem from the new advantages created by the continuous emergence of the new dynamics of development in China. In 2023, strategic emerging industries, represented by new-generation information technology, biotechnology, high-end equipment, and green environmental protection, have developed rapidly in China. The export share of new-energy vehicles, PV and lithium battery products - known as China's "new three items" - has significantly increased. Products with high technology and?high added value and those that lead the green transformation have become new drivers of export growth. The concerted efforts of the Chinese people in technological innovation are bearing fruit on a large scale. Such confidence and strength stem from China's new achievements amid the complex and turbulent external environment. In 2023, China's international influence, appeal, and shaping power have significantly increased: from the talks between Chinese and Russian top leaders at the Kremlin to the summit meeting between the heads of state of China and the US in San Francisco; from successfully mediating the restoration of diplomatic ties between Saudi Arabia and Iran to actively promoting the expansion of the BRICS; from leading bilateral relations to orchestrating multilateral diplomacy; from closely interacting with major powers to deepening South-South cooperation. China's Global Development Initiative, Global Security Initiative, and Global Civilization Initiative continue to receive broad support and positive responses from the international community. Such confidence and strength stem from the pragmatic and hardworking nature of the Chinese people and their aspirations for a better life. Chinese people aspire to live better lives and are willing to continuously exert tangible efforts toward this goal. This determination is the fundamental driving force for the ongoing development of Chinese society. At a strategic level, it manifests as the unwavering commitment to advance Chinese modernization, considering it as the "ultimate political goal." In terms of development logic, it is reflected in the concentrated efforts to manage internal affairs effectively and promote Chinese modernization through high-quality development. Meanwhile, we understand that happiness is achieved through hard work and solid efforts, and no one expects 2024 to be easy and smooth sailing. However, we believe that in response to the questions of China, of the world, of the people and of the times, millions of Chinese people, united under the banner of the Party, will stand together like "a solid piece of steel." With tenacity and unwavering efforts, we are confident that the answers we provide will undoubtedly be outstanding.

?The Chinese economy was?expected to?recover quickly in 2023 and resume its role as the undisputed engine of global growth. Instead, it stalled to the point where it’s being called a “drag” on world output by the International Monetary Fund (IMF), among others .Despite its many problems — a property crisis, weak spending and high youth unemployment — most economists think the world’s second largest economy will hit its official growth target of around 5% this year .But that is still below the 6%-plus annual growth averaged in the decade before the Covid pandemic, and?2024 is increasingly looking ominous, they said. The country may be staring at decades of?stagnation thereafter.“ The 2024 challenge for the Chinese economy will not be GDP growth — that will likely be above 4.5%,” said Derek Scissors, senior fellow at the American Enterprise Institute, a center-right think tank. “The challenge will be that the only direction from there is down.”Without major market reforms, the country could be stuck in what economists call “the Middle Income Trap,” he warned, referring to the notion that emerging economies grow quickly out of poverty only to get trapped?before they reach high-income status.

THE VISIBLE CHANGE

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The Chinese economy, which is plagued by a litany of challenges, didn’t get to this position overnight. Scissors said the previous administration of President Hu Jintao had flooded the economy with liquidity in 2009 during the depths of the global financial crisis to boost growth. Xi’s government was reluctant to rein in the borrowing after coming to power in 2012, which caused structural problems to build up. Logan Wright, director of China markets research at Rhodium Group, agreed, saying: “The slowdown in China’s economy is structural, caused by the end of an unprecedented expansion in credit and investment over the past decade. ”The country’s financial system simply won’t be able to generate the same levels of credit growth that it has in previous years, he said, therefore Beijing will have far less control over the direction of its economy than it has in the past. Enter your email to receive CNN's nightcap newsletter.

Bottom of Form

What made things worse was Beijing’s stubborn embrace of a zero-Covid policy of stringent lockdowns?and its sweeping crackdown on private enterprise, which deeply hurt confidence and battered the most vibrant part of the economy. The consequences of these policies can be seen in the slowdown this year. Consumer prices have been weak for most of 2023 due to sluggish demand, and there is a risk of a deflationary spiral.

The real estate crisis has deepened.?Plunging home sales?have pushed some healthy developers like?Country Garden?to the brink of collapse. The crisis has spilled over to the massive?shadow banking sector, causing defaults and sparking protests across the country. Local governments are struggling with?financial difficulties?after three years of Covid spending and declining land sales. Some cities can’t repay their debts and have had?to?cut basic services?or?reduce medical benefits?for seniors. Youth unemployment?has become so bad that the government?stopped. Foreign companies have grown wary of Beijing’s?rising scrutiny?and are?pulling out of the country. In the third quarter, a measure of foreign direct investment (FDI) into China turned negative for the first time since 1998. A September survey by the American Chamber of Commerce in Shanghai showed that only 52% of respondents were optimistic about their five-year business outlook, the lowest level since the survey began in 1999.

Will China? looks similar to Japan

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As China’s growth slows, some economists have drawn comparisons with Japan, which experienced two “lost decades” of stagnant growth and deflation after its real estate bubble burst in early 1990s.But Scissors doesn’t think it will go that way, at least not immediately.“ The rest of the 2020s won’t look like a lost decade — Chinese GDP growth will stay well above zero,” he said.

In the longer term, however, the biggest economic problem could be demography. Last year, China’s population?fell to 1.411 billion, marking its first decline since 1961.Its total fertility rate, the average number of babies a woman?will?have over her lifetime, also?dropped to a record low?of 1.09 last year from 1.30 just two years before. That means China’s fertility rate is now even lower than Japan’s, a country long known for its ageing society. Demographics can have a significant impact on an economy’s growth potential. A decline in the labor supply and increased healthcare and social spending could lead to a wider fiscal deficit and higher debt burden. A smaller workforce could also erode savings, resulting in higher interest rates and declining investment. Housing demand, for example, may fall in the long term.“ In the 2040s, population contraction will make aggregate growth impossible,” Scissors said. “Without sharp policy changes, there’s no bounce back for China — the 2030s will be worse than the 2020s.”

China’s government, strapped for cash after years of enforcing a costly zero-Covid policy, is cutting medical benefits and planning to raise the retirement age, in deeply unpopular moves that are fuelling widespread public anger.

CUT IN MONTHLY MEDICAL BENEFIT

Thousands of elderly people have been taking to the streets since January to protest big cuts to monthly medical benefit payments. They’ve gathered in four major cities across the country, demanding local officials reverse the decisions. The changes are part of a national overhaul mainly intended to cover deficits in public medical insurance funds, according to analysts, which have been drained after?paying for?mass testing, mandatory quarantine and other pandemic controls over the past three years. The demonstrations, dubbed by Chinese media as a?“gray hair movement,” are another rare rebuke for authorities after?widespread protests?gripped the country in November against Covid lockdowns. The anger could?further undermine trust in the Communist Party already damaged by?Covid lockdowns,?banking scandals?and?a?real estate crisis.

“Chinese pensioners view these latest reforms as yet another broken party promise, one that could profoundly impact their quality of life in the face of China’s looming demographic crisis,” said Craig Singleton, senior fellow at the Washington-based Foundation for Defense of Democracies. Chinese officials appear to be worried that these protests could spread further. Censors removed hashtags for “Wuhan health insurance” from Weibo’s hot topics section after the demonstrations began in January. They also censored photos and videos of the protests from social media.?Fueling the anger is a new drive by Beijing to push back the retirement age for all workers.

Dire finances

For nearly three years, local governments?bore the brunt?of enforcing the now-defunct pandemic controls, resulting in soaring expenditures even as their income from revenue sources such as land sales slumped. The concerns were sparked after Guangdong province and the city of Dalian? announced in 2022 that they would tap public medical insurance funds to pay for mass Covid testing. The issue was exacerbated when, shortly after, the National Healthcare Security Administration (NHSA) said the money?shouldn’t be used?in this way and that local governments should fund the testing with their own budgets.

Elderly protest health insurance cuts in China's Wuhan

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State media reported at the time that some other regions had already spent public money on mass testing. The reports triggered fears about the future sustainability of the already underfunded health insurance system. Enter your email to receive CNN's nightcap newsletter.

It’s unclear exactly how much China has spent in total on maintaining its ultra-strict zero-Covid policy, or where that money came from. But at least 17 of the country’s 31 provinces have revealed the enormous sums they’ve spent on fighting the pandemic.

Guangdong, the richest province in China, was the biggest spender. It spent 711 billion Yuan ($10.3 billion) in 2022 on measures such as vaccination, testing and emergency benefits for medical workers, an increase of more than 50% from the year before. Zhejiang and Beijing spent 43.5 billion yuan and 30 billion yuan respectively. “Local governments are running short of money, or in some cases, out of money,” said George Magnus, an associate at the China Centre at Oxford University. Funding zero-Covid was the most proximate cause for the crunch, but local finances are deteriorating for other reasons too, notably the rising burden of expenses associated with age-related spending. ”Interest costs on trillions of dollars of debt and falling revenues from land sales have also worsened government finances, he said. China’s outstanding government debts might have surpassed 123 trillion yuan ($18 trillion) last year, of which?nearly $10 trillion is so-called “hidden debt,”?according to Chinese analysts. The debt problem has gotten so extreme that some cities are unable to provide basic services, such as heating homes.

Covering the shortfall

China’s health insurance scheme is a key part of its limited social safety net. It covers a portion of medical costs for current and retired workers in urban areas. It consists of individual accounts, funded by mandatory payments from workers and their employers, and a pool of funds made up of employer contributions. The personal account is used to pay for medicines and outpatient costs, while the collective account is used to pay for hospital visits. Retirees don’t need to contribute and receive a monthly payment into their personal accounts from the collective pool.?

One Chinese province spent $22 billion on eliminating Covid before policy U-turn

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After the reforms, which were introduced starting in January, payments to all personal accounts were reduced. The elderly, who tend to have more medical needs, are more sensitive to the changes. In the central city of Wuhan, retirees saw monthly cutbacks of as much as 70%. Soon after the protests in Wuhan and the northeastern port city of Dalian, the NHSA?issued a statement?defending the policy, saying even though people would have less money in their personal accounts, there would be more funds flowing into the collective account as a result.

To protesters, however, it looked like local governments were dipping into their individual accounts to cover the shortfalls of the collective pool.

“The notion of robbing pensioners to pay back the party for the costs associated with compulsory Covid testing and other expensive pandemic measures was never going to sit well with the general populace,” Singleton said.

An aging society

In the longer term, the “gray hair movement” is indicative of a fundamental issue facing the Chinese government: how to care for a rapidly aging society where 400 million people, or 30% of the population, will be 60 or older by 2035. China’s public health care system and other public services have come under increasing financial strain as the number of retirees outpaces the number of young people entering the workforce. A leading government think tank forecast in 2019 that the state pension fund could run dry by 2035 due to a dwindling workforce.“[The] crunch affecting health insurance is only a stone’s throw away from the larger one affecting pensions, and workers could edgily become agitated over poor pension and health care security,” Magnus said. “It’s possible protests by elderly citizens will spread.”

To address the challenge, the government is making a new push to raise the retirement age.Li Qiang, the country’s new premier, said?in March that the government would conduct rigorous studies and analysis to roll out a policy prudently “at an appropriate time.”? The news has already sparked a fierce backlash on social media, with tens of thousands of angry responses. Leading the complaints were people close to retiring, who expressed anger over the prospect of delayed access to their pensions. Younger people argued that they would have fewer jobs because of greater competition.

“There has to be some resolution of the financial capacity of local governments to meet current, and prospective, age-related costs,” Magnus said. “Otherwise, there could be rolling crises, layoffs, and reduced provision of public goods and services which could lead to political trouble.” From health care to public infrastructure, local governments have many bills to pay. But they are facing an acute shortfall of cash, as three years of strict pandemic controls and a real estate crash have drained their coffers. While some regional governments may roll back the health insurance changes after witnessing the uproar, “some may have to do it no matter what, as they really run out of money and can’t find other sources of income,” said Frank Xie, a professor in business at University of South Carolina Aiken.

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CONCLUSION

Myriad of problems cropped up to be taken seriously. All negative reason has making glooming picture. After addressing these above problems, its economy may suffer in 2024.