Proper monetary, liquidity policies key to economic tailwinds

The Chinese economy concluded 2023 on a stable note, achieving its annual target with a year-on-year GDP growth rate of 5.2 percent.

The growth rates for each quarter followed a distinctive N-shaped pattern, with Q1 at 4.5 percent, Q2 at 6.3 percent, Q3 at 4.9 percent and Q4 at 5.2 percent.

A closer examination of the data for December showed that, as the effect of macroeconomic policies kicked in, the national economy maintained a steady recovery momentum, with most indicators showing improvement or stability, except for the real estate sector.

Looking ahead to 2024, it is expected that the government will set a growth target of around 5 percent. Policy measures will be strengthened to effectively address concerns about deflation and push the actual growth rate closer to the potential growth level.

China’s economy faced a challenging landscape throughout last year, marked by external pressures and internal difficulties. It, however, managed to maintain its recovery momentum and achieve the annual target, showcasing resilience and adaptability.

The overall development of the economy in 2023 can be characterized as “wavelike progress with twists and turns”, as it experienced better-than-expected growth in the first quarter, a rebound in the second, and a bottoming-out recovery in the second half of the year.

China’s industrial and service sectors have demonstrated resilience and maintained steady growth, contributing to the overall stability of the country’s economy.

The country’s value-added industrial output, an important economic indicator, went up 4.6 percent year-on-year in 2023, surpassing the 3.6 percent growth recorded in 2022. Notably, various subsectors within manufacturing reflected different growth patterns, indicating ongoing efforts to upgrade the industry.

According to official data, hightech industries experienced an average growth rate of 4.6 percent over the past two years, up from 4.1 percent, and general equipment manufacturing rebounded from a slight decline of 0.1 percent to an average growth rate of 0.5 percent during the same period.

The retail sales of consumer goods, a major indicator of the country’s consumption strength, climbed 7.2 percent year-on-year in 2023, outpacing the 0.2 percent overall fall in the year before. While indicating a weak recovery in consumer spending, the foundation for sustained growth remains to be consolidated.

Meanwhile, China’s per capita disposable income increased by 6.1 percent in real terms throughout the course of the year, surpassing the GDP growth rate and progressively getting closer to pre-pandemic income growth rates.

Concerns about the future have influenced consumer sentiment. An uncertain economic environment, coupled with ongoing adjustments in the real estate and capital markets, have dampened consumer confidence. As a result, individuals have become more cautious in their spending habits, prioritizing savings and financial security.

Stimulating consumption

Going forward, China’s employment pressure is expected to alleviate, and the lingering effects of the COVID-19 pandemic are also anticipated to gradually fade over time.

Furthermore, the Central Economic Work Conference — where Chinese top leaders charted the course for the economy in 2024 — has emphasized the need to stimulate potential consumption, indicating positive prospects for consumer spending, particularly in goods consumption, while service consumption is expected to remain resilient.

However, the overall growth rate, which may be slightly lower than the previous year due to the drag from a high base, is projected to be around 5.5 percent in 2024.

Fixed-asset investment experienced a modest year-on-year growth of 3 percent throughout 2023. Although the full-year figure rose by 0.1 percentage point compared to the period from January to November, the growth rate remained lower than the 5.1 percent recorded in the previous year.

The resilience of infrastructure investments and the accelerated pace of investment in the manufacturing sector were the main drivers of this growth.

Official data showed that infrastructure investment experienced a robust year-on-year growth of 5.9 percent in 2023, while manufacturing investment recorded a growth rate of 6.5 percent. However, private investment witnessed a slight decline, falling by 0.4 percent compared to the previous year.

This year, it is anticipated that infrastructure investment will continue to play a crucial role in supporting the economy, with a projected annual growth rate of about 5 percent. The recovery of exports and increased production capacity are expected to contribute to the revival of manufacturing investment, with its growth rate expected to reach around 7 percent.

In addition, private investment, buoyed by a package of well-focused supportive policies, is also expected to show signs of recovery, with a projected growth rate of approximately 2 percent.

For the entire year 2023, China’s investment in real estate development fell by 9.6 percent compared to the previous year. The outcomes mostly matched what the market had anticipated.

The real estate market is expected to encounter ongoing challenges in 2024. Inadequate income confidence, weak housing price expectations, and mistrust in presale property may dampen residents’ confidence in making significant financial commitments, including taking on additional debt for housing purchases.

However, policies such as the consecutive reduction of over-five-year loan prime rate, on which many lenders base their mortgage rates, as well as improved market conditions, may help sustain sales in the real estate sector. The sales area of commercial housing this year is expected to remain comparable to that of 2023.

Economic road map

In order to kick-start the economic agenda for the year and set a positive trajectory, China should pursue a prudent monetary policy in a flexible and appropriate way and maintain a proper and adequate liquidity supply, to create a favorable monetary and financial environment in better service of the real economy.

The central bank’s decision on Jan 15 to extend operations of the medium-term lending facility without a policy rate cut indicates a cautious approach to managing liquidity in the financial system. Market analysts and experts anticipate that a more relaxed monetary policy is on the horizon, with expectations centered on the months of March and April.

Besides, China has adopted a moderate expansionary fiscal policy aimed at bolstering economic growth this year, with focus on maintaining appropriate expenditure levels, rationalizing government investment scales, increasing transfer payments, and optimizing tax and fee policies.

It is anticipated that the deficit rate target for 2024 will fall within the range of 3 percent to 3.5 percent, while the scale of special bonds is expected to be around 4 trillion yuan ($556.1 billion).

Drawing from international practices, it may be worthwhile for China to consider establishing a specialized institution under central government auspices to acquire distressed real estate firms or projects, ensuring the smooth mitigation of market risks.