China: 2024 outlook

We expect a moderate recovery in the Chinese economy to extend into 2024 as recently beefed-up government policy support will likely continue.

The authorities’ policy support has only started to pick up strength in earnest since the end of August. A series of measures aimed at boosting property demand was first introduced, followed by much stronger fiscal stimulus to support infrastructure growth. For example, the pace of local government bond issuance has risen sharply since August. In addition, the Chinese government has taken the rare decision to in-crease its fiscal deficit by Rmb1 trn through the issuance of special government bonds. The step-up in policy support led to a notable improvement in growth momentum in Q3, when annual GDP (4.9%) exceeded consensus fore-casts. We expect a moderate recovery to extend into 2024, but it could be bumpy. Our full-year GDP forecast for 2024 stands at 4.7%, down from an expected 5.2% in 2023.

The property sector will likely remain a drag on growth, although to a lesser extent than before. More financial support to developers is needed to stabilise the sector, but some recently announced measures seem to point in the right direction. With continued policy stimulus and a possible moderate improvement in the property sector, China may pull itself out of deflation in 2024. Reflation in the industrial sector will be key.

We expect fiscal stimulus to continue to play an important role in supporting growth in 2024. At the central government level, the fiscal deficit target will likely stay at around the same high level as in 2023, about 3.8% of GDP. However, to address the on-going debt problem at the local government level arguably is more important to boost growth outlook in the near term than the headline deficit level.

The pandemic hit Chinese local governments’ revenue hard. Land sales and home sales again plummeted in 2023, putting local governments under tremendous financial pressure. They have had to cut back on their traditional responsibility for infrastructure investment, and in some extreme cases day-to-day spending has had to be reduced. This effective tightening of fiscal conditions contributed to the weakness of the Chinese economy in the first half of 2023. But starting in Q3, the central government started to address financial stress at local governments seriously.

There are three risks to our central scenario: policy that remains behind the curve, a severe global deceleration and a resurgence in US-China tensions.