Prudential policies will help stabilize economy
Looking back on 2023, global inflation and economic downturn were intertwined, while monetary tightening came to an end in some developed countries. Meanwhile, anti-globalization sentiment has led to rising geopolitical risks.
All these external changes have profoundly affected the Chinese economy.
How will the world economy change in 2024?
Our outlook is as follows:
To begin with, the world economy is expected to enter the second stage after the COVID-19 pandemic, with a series of new changes and characteristics.
This year will see gradual inflation pressure. The economic growth of the United States and Europe will decline. Monetary policies in the US and Europe will shift from tightening to loosening.
Although the Red Sea crisis may affect global trade to a certain extent in the first half, we believe there might be more opportunities than challenges for China.
In 2024, more capital is expected to flow from the US to emerging markets. Those with sound economic performance, like the Chinese market, will become important beneficiaries.
Second, macroeconomic policies will intensify this year.
China will further strengthen countercyclical and cross-cyclical adjustments in terms of macroeconomic policies. The country will adopt a more stable, proactive fiscal policy to improve quality and efficiency, and maintain the necessary expenditure intensity.
The nominal target of the budget deficit rate may be maintained at around 3 percent, while the final actual deficit rate is likely to reach or exceed 3.8 percent.
The country is likely to issue 1.5 trillion yuan ($208.5 billion) of special refinancing bonds used for repaying local debt.
Monetary policy will be flexible, appropriate, precise and effective.
The medium-term lending facility has room to fall by 10-20 basis points and the loan prime ratio will also be lowered accordingly. The reduction in deposit rates may be slightly larger than that of lending rates.
Third, the infrastructure and manufacturing sectors are expected to stabilize investment in 2024.
Infrastructure investment will play a strong supporting role for stabilizing economic growth this year. There is considerable room for development of traditional infrastructure projects in the central and western regions and “new infrastructure” projects in the eastern regions.
Manufacturing investment will become another stabilizer of economic growth. The demand for investment in technological transformation may continue to increase while high-tech manufacturing may remain strong.
Private investment may gradually pick up, while financial support may strengthen. As external demand picks up and drives manufacturing investment to maintain steady and rapid growth, infrastructure investment and manufacturing investment are expected to grow by 8 percent and 7 percent, respectively.
Fixed-asset investment may grow by 5 percent and the contribution rate of investment to the GDP may rise to about 40 percent.
Normal consumption
Fourth, consumption is expected to return to normal.
Consumption will continue to maintain a recovery trend of steady and rapid growth this year, but its contribution rate will decline. Driven by positive factors, including improvement in employment, rising residents’ income, stabilization of real estate, rapid growth of service consumption, rising prices of consumer goods driven by a recovery of the CPI and PPI, and further consumption-promoting policies, it is expected that the retail sales of social consumer goods will grow by 5.5 percent in 2024.
However, as the contribution rates of both investment and exports rise, the contribution rate of final consumption expenditure to GDP may fall to about 60 percent. But it will still be significantly higher than the average level of the past decade by about 5 percentage points.
Fifth, the real estate market will gradually stabilize.
In 2024, real estate policies will continue to be supportive, which may promote the gradual release of residents’ demand for home purchases, including some reasonable financing demands of private real estate enterprises.
It is expected that key indicators such as real estate sales, housing prices and investment may first decline before rising.
The annual residential area may fall by 5 percent, and the price of new homes may remain stable. Investment in the real estate sector may fall by 6 percent year-on-year, narrowing from the decline in 2023.
Sixth, exports are expected to bounce back.
In 2024, the export growth rate is likely to rise, while the decline in imports is expected to narrow. The contribution rate of net exports to economic growth will turn from negative to positive.
Although the recovery of external demand is limited, the advantages of the entire industrial chain, the upgrade of commodity structure and the strategy of diversifying trade partners will make China’s exports highly resilient this year.
However, factors such as geopolitical conflicts and relocation of the manufacturing sector may still exert a certain drag on exports, but the Red Sea crisis may have opportunities for China’s exports.
It is expected that exports will grow by 0.5 percent and imports by 1 percent in 2024, and the contribution of net exports to GDP is expected to return to positive levels.
Seventh, commodity prices recover.
In 2024, the country’s GDP growth rate is likely to reach about 5 percent. Under active expansionary macro policies, consumption and capital may boost GDP by 3.6 and 1.4 percentage points, respectively.
The growth rate of commodity price is likely to be faster in the first will and third quarters than in the second and fourth quarters. It is expected that the CPI will rise by 1.3 percent year-on-year in 2024, with food prices stabilizing and rising service industry prices being the main driving forces. The PPI may see 1 percent year-on-year growth this year.
Eighth, financial risks are expected to be mitigated and controllable in 2024.
There will be greater pressure to prevent and control real estate risks. During the year, the interest expenses of real estate companies may account for more than 15 percent of the total funds. More financial instruments are needed to mitigate and reduce the financial risks of real estate companies.
Under a backdrop of weakening debt repayment pressure, guaranteed borrowing scale, and reducing financing costs, local government debt problems are expected to improve during the year.
However, the financial market is showing signs of systemic risks. The current periodic declines in the RMB exchange rate, stock market and bond market are causing asset prices to shrink accordingly. Market liquidity risks have increased sharply, and investor confidence has been further dampened.
Ninth, the RMB exchange rate will rise in 2024.
There might be changes between China and the US in terms of monetary policy, growth path, price level and international balance of payments, all of which will further promote the weakening of the US dollar and the strengthening of the RMB.
In the second half of 2024, the RMB will maintain an appreciation and stabilizing trend, and the exchange rate may move further upward before the end of the year.
Finally, macroeconomic policies will become more targeted and coordinated in 2024.
China’s economy will continue to recover and achieve steady progress and improvement. However, there are still problems at the micro level such as unstable expectations, insufficient confidence and weak demand.
In order to further accelerate economic growth and increase macroeconomic policy control, it is recommended to appropriately increase the level of government debt, further enrich the tools and means of monetary policy, take multiple measures to promote consumption, and increase financial support for real estate enterprises.
More efforts should also be made to maintain the stability of the RMB exchange rate and avoid launching contractionary and inhibitory policies related to financial market liquidity, and actively explore financial support for technological innovation and the construction of a modernized industrial system.