Why China is rebalancing growth drivers
Against the backdrop of an uncertain global economic recovery and rising geopolitical tensions, the Chinese economy showed signs of improvement in 2023. Last year, the nation’s GDP grew 5.2 percent, reaching its annual target and exceeding growth rates of various developed economies.
However, it is worth noting that the overall compound growth rate over the past two years stood at 4.1 percent, pointing to a state of “moderate recovery”. Furthermore, the recovery pace fluctuated, with relatively low nominal growth, supplydemand imbalances and lackluster price performance in both goods and asset markets.
China’s economy will continue to be influenced by the aforementioned variables in 2024. Normalizing economic processes necessitates several essential rebalancing actions in sectors such as investment, consumption, real estate and government debt.
Looking ahead, China’s economy is expected to continue its positive trajectory this year, supported by multiple factors, which indicate a growth rate of around 5 percent.
China’s economy successfully emerged from the depths of the pandemic-induced downturn in 2023, marking a complete year of postpandemic recovery.
While China’s return to normalcy came slightly later than some overseas counterparts, such as the United States, Japan and South Korea — which began their recoveries in early 2022 — China’s current economic growth rate still outperforms that of most developed economies.
The service and consumption sectors, which were severely affected during the pandemic, experienced a significant recovery in 2023. Both sectors contributed to overall growth, with consumption surpassing prepandemic levels.
That said, it is equally important to mention that key macro indicators, including industrial output, retail sales, fixed-asset investment and private financing, remained below 2019 levels.
China’s output gap, a measure of the difference between actual and potential economic output, gradually narrowed throughout the year, falling from 940 billion yuan ($131 billion) in the first quarter to 390 billion yuan in the fourth quarter.
However, the foundation of the ongoing economic recovery remains fragile, primarily due to the fluctuating pace of economic restoration. Quarterly GDP growth rates revealed a notable slowdown in the second quarter, followed by a significant rebound in the third quarter, and a slight decline in the fourth quarter.
In 2023, China’s nominal GDP growth stood at 4.6 percent, representing the total value of economic output without adjusting for inflation. However, the actual growth rate, which takes into account inflation and measures real economic expansion, was 0.6 percentage point higher than the nominal figure.
The lower nominal growth rate creates a perception gap among microeconomic entities because businesses’ direct revenue, profits and individuals’ direct incomes are measured in nominal terms.
They do not typically account for the GDP deflator, which adjusts for inflation, when assessing the real income situation. Consequently, the nominal growth rate tends to underestimate the actual economic growth experienced by microeconomic entities.
China’s economic recovery in 2023 faced various downside drivers, especially disruptions in real estate investment and exports. Property investment fell month after month last year, resulting in a 9.6 percent decrease in 2023. The current pace of housing construction and new project startups remains slow. Furthermore, exports saw substantial swings, resulting in a 4.6 percent decrease for the year.
Meanwhile, China’s economy demonstrated resilience and growth on the production side, while facing certain pressures on the demand side. The imbalance between supply and demand has resulted in low inflation levels and an overall decline in asset prices since 2023.
The consumer price index, a main gauge of inflation, recorded a yearon-year increase of 0.2 percent in 2023, while the core CPI, which excludes food and energy, rose 0.7 percent. On the other hand, the producer price index, which measures costs of goods at the factory gate, contracted by 3 percent.
Residential property prices in major cities experienced continuous declines last year, particularly in the secondary housing market, which reflects current market conditions more accurately.
This combination of lackluster price levels and declining asset prices has been a significant factor in the negative GDP deflator, indicating that persistent deflationary pressure has yet to be fully eliminated.
As China faces multiple challenges in 2024, the key to overcoming and addressing these challenges lies in achieving a crucial rebalancing within key sectors of the economy. This rebalancing needs to be accomplished at an optimal level, enabling the economy to achieve a balanced and growth-oriented trajectory on a relatively sturdy foundation.
China’s fixed asset investment growth has remained below prepandemic levels, highlighting the need for a rebalancing of investment demand and structure. Investment in high-tech manufacturing and high-tech services has shown faster growth rates, and the proportion of high-tech industries in fixed asset investment continues to rise.
However, there is still a need to further leverage high-tech’s role in driving and spurring upstream and downstream industries. Investment demand unleashed during the process of industrial upgrading and equipment renewal presents room for further growth.
In 2023, China’s infrastructure investment maintained a growth rate of 5.9 percent, significantly higher than the prepandemic level of around 4 percent. Infrastructure investment continues to be a crucial factor supporting the economy.
However, the infrastructure investment structure still requires further optimization. While existing projects have reached saturation levels, the marginal efficiency of “new infrastructure” investments has shown signs of decline. It is essential to prioritize investments in areas that directly impact people’s livelihoods and address weak links such as eldercare facilities.
In 2023, China’s consumption recovery exhibited a structural characteristic of weaker momentum in goods while showing stronger performance in services, stressing the need for rebalancing the structures of consumer demand and supply to foster sustainable economic growth.
In the short run, there were signs of weak consumption in industrial goods and real estate-related sectors. To address this, measures such as issuing consumer subsidies and stabilizing real estate expectations were implemented to alleviate the situation.
Looking at the medium to long term, unmet demand for eldercare, healthcare and upgraded lifestylerelated consumption — influenced by factors such as changes to population structure — requires greater attention. Structural reforms on the supply side should be accelerated in areas of weakness and livelihood improvements, ultimately driving a positive interaction between supply and demand.
Moreover, China’s economy should seek to rebalance its growth drivers, smoothly transitioning from traditional industries to new sectors. China’s new growth drivers are experiencing rapid growth, but there is still ample room for further improvement.
The new energy sector serves as an illustrative example as the country has witnessed a significant increase in exports of the three major tech-intensive green products, or the “new three” — new energy vehicles, lithium-ion batteries and photovoltaic products. However, despite the high growth rates, these products account for only around 4.5 percent of total export value, indicating substantial potential for expansion.
China’s real estate sector is undergoing a crucial transformation as the old model characterized by high debt, leverage and turnover becomes unsustainable. To ensure long-term stability and sustainable growth, the industry is shifting toward a new model focused on safe leveraging, efficient operations and greater specialization.
The country has experienced a major shift in supply-demand dynamics within the real estate market, with oversupply becoming apparent in various regions. However, there remains a notable lag in the construction of government-subsidized housing, particularly in firstand second-tier cities.
To address the imbalances in the market and ensure a more sustainable and inclusive housing environment, a dual-track approach is being emphasized, which involves the simultaneous development of commercial and government-subsidized housing.
China’s local governments are facing a challenging financial landscape as declines in land revenue lead to reductions in comprehensive financial capacity. Resolving local debt risks remains a top priority for 2024. The leveraging ratio of the central government is only about 21 percent, which is relatively low by global standards.
Against this backdrop, the central government can appropriately increase borrowing, undertake more countercyclical macroeconomic regulation responsibilities, and implement reforms to better clarify the division of administration and expenditure responsibilities between the central and local governments.