Toward China’s Soft Rebound – Analysis
Last year, international observers charged China for global inflation, deflation and economic collapse. In reality, Chinese economy is inching toward a soft rebound, despite the dire global landscape.
As global business and political leaders swarmed to Davos for the World Economic Forum, Chinese Premier Li Qiang took the podium. Chinese economy has rebounded and moved upward, Li noted, and was estimated to have grown around 5.2% in 2023. That’s slightly better than the official target of around 5%.
No matter how the world’s situation changes, Li added. China will adhere to its fundamental national policy of opening up, and its door will only get wider and wider.” he said.
Brighter macroeconomic outlook
Chinese economy is heading toward a soft rebound. In the 4th quarter of 2023, GDP growth amounted to 5.2%. Moreover, retail sales grew by 7.4% in December from a year ago. Chinese consumers are gradually returning to the marketplace, but they remain cost-conscious. However, the impending China’s New Year is likely to generate “9 billion passenger trips”; which will accelerate growth in retail, tourism and transportation sectors.
In fact, there is significant pent-up demand in China, stacked in the above-trend deposits. The trick is to unleash that consumption power, and the first condition is a promising job market outlook. According to China’s National Bureau of Statistics, the unemployment rate in cities in December was 5.1%.
Even more interesting is the figure for youth unemployment. Last summer, the unemployment rate for young people aged 16 to 24 soared to record 21.3%. Now, that figure is at 14.9%. That’s about where it was back in January 2022; closer to the past norm.
Furthermore, industrial activities are picking up, with industrial production rising by 6.8% in December from a year earlier, thus beating forecasts. And the same goes for fixed asset investment, which increased by 3% in 2023, slightly above the predicted increase.
Importantly, there is also broad expectation for targeted fiscal support. And in light of the elevated real interest rates, space remains for rate cuts. When will they come? The 10-year real yield of China has risen to 2.89% relative to 1.69% of the US, where policy rates remain high, due to perceived inflation concerns. As the Fed is likely to enter the rate cut cycle later in 2024, China’s cuts will ensue.
Hence, too, President Xi Jinping’s stress of sustained efforts in building China’s “financial power,” aiming at a safe, efficient and internationally competitive financial system.
Steadying property sector
As premier Li noted at Davos, China has now some 400 million people in the middle-income group, and that number is expected to double to 800 million in the next decade. By contrast, in the past four decades, middle-class real income has largely stagnated in the United States while Europe is following in the footprints.
In the next decade, urbanization in China will create huge demand in sectors such as housing, education, medical and elderly care, as Li noted Davos. There are still nearly 300 million rural Chinese who will eventually migrate to cities. That translates to great secular potential for investments in upgrading urban transportation and telecoms infrastructure – and a substantial opportunity to domestic and international financial institutions.
After several years of deleveraging in the ailing property sector, Chinese economy seems to have consolidated a soft landing which bodes well for a soft rebound in 2024.
The full recovery of the property market will take its time. The tier-one high-income megacities are usually able to borrow more to support local development, while low-income cities are constrained from aggressive public finance.
As S&P Global Ratings reports, Chinese property sector, though evolving, seems to have steadied and balanced.
Shifting growth model
At the same time, China’s growth model has gradually shifted from investment and exports toward consumption and innovation. A massive process that took a century or so in the West, but just few decades in China.
In two to three decades, China has moved from catch-up imitation to cutting-edge innovation. In the mid-2000s, steel production growth still peaked at 30%; but today it is decelerating into negative. Meanwhile, China’s booming electric vehicle (EV) sales increased by 82% in 2022, accounting for nearly 60% of global EV purchases. This greatly surpasses that of the U.S., and other large-economy early adopters of EVs.
Accordingly, economic reforms are likely to shift away from supply-side reforms to demand-side reforms.
To accelerate this transition, policymakers are likely to focus increasingly on the constraints of human capital rather than infrastructure, which worked in the past. And these changes require parallel reforms and support particularly in property, education and healthcare sectors.
Downside risks in the global horizon
Nonetheless, risks remain in 2024 on unfinished homes, local government debts and geopolitical risks. The first two could now be regarded as soft risks; but the third one is a black swan; highly consequential, yet unpredictable.
Perhaps that’s why just a month ago, Gita Gopinath, the deputy chief of the International Monetary Fund, asked whether the world community is on the brink of Cold War II. “The economic costs of Cold War II could be large,” she warned, rightly. “The world has become much more integrated, and we face an unprecedented breadth of common challenges that a fragmented world cannot tackle.”
Currently, the challenging external headwinds reflect some moderation. But as long as the West’s geopolitical unilateralism and trade protectionism prevail, global recovery will remain constrained by downside risks and the potential for new and ever-more destructive, unwarranted wars.
As China’s massive transition and the West’s secular stagnation suggest, what the world need is peace and economic development – not economic unilateralism and geopolitical friction.
A version of the commentary was published by China Daily on Jan. 18, 2024
