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Treasury & Capital Markets
China recovers, restructures towards high-quality
Despite strong external headwinds, real estate downturn, economy grew 5.2% in 2023
The Asset 10 Jul 2024

China’s economic recovery has continued to gain traction aided by a rebound in external demand and diminishing drag from its real estate sector correction, with GDP growth projected at 5.3% in 2024 and 4.9% in 2025, according to a recent report.

Chinese authorities have embarked on a major restructuring of the economy through mobilizing “new quality productive forces” in the economy to enhance the quality of growth and transition to a technologically advanced economy, finds an assessment report by the Asean+3 Macroeconomic Research Office (Amro) after its annual consultation visit to China from June 4 to 18.

The Amro team was led by lead economist Jae Young Lee, while Amro director Kouqing Li and chief economist Hoe Ee Khor participated in key policy meetings. The discussions centred on the drivers of the recovery and short-term risks, the effects of geoeconomic fragmentation on global supply chains and trade patterns, the correction in the real estate sector, strains in local government finances and long-term fiscal management, and key structural challenges.

Economic developments, outlook

“China’s growth is expected to come in at 5.3% in 2024,” says Lee. “Consumption remains the primary growth driver, supported by greater traction in investment and a rebound in external demand. Due to a robust supply-side recovery, inflation was subdued at 0.2% in 2023, and 0.12% in January-May 2024, but is expected to rise to an average of 0.8% for the whole year.”

Despite strong external headwinds and a downturn in the real estate sector, the report notes, China’s economy was resilient and grew by 5.2% in 2023. Helped by a rebound in external demand and supportive fiscal and monetary policies, the economy is expected to gain momentum for further recovery in 2024 before moderating to a trend rate of 4.9% in 2025.

The country’s macroeconomic fundamentals, the report points out, remain sound. Both consumption and investment, especially in high-tech manufacturing and high-tech services, are expected to pick up further. The real estate sector is undergoing a major correction and is expected to bottom out in the first half of 2025 as policy measures take greater effect and sentiment improves. And trade recovery is well underway, led by an upturn in electronics cycle, bringing positive spillovers to domestic economic activities. 

Risks, vulnerabilities

The balance of risks is slightly tilted to the downside, the Amro report argues, with uncertainties in the external sector and challenges domestically.

External risks include an unexpected tightening in US monetary policy due to persistent high inflation, as well as escalating geopolitical tensions or adverse geopolitical events. These risks could drag global growth down, heighten protectionist measures or cause more damaging geoeconomic fragmentation.

Major domestic risks include potential setbacks in the recovery of the real estate sector, persistent financial strains on some local governments, and a deterioration in asset quality of some rural commercial banks.

Longer-term challenges would stem from climate change, de-globalization and population ageing.

Upside risks include external demand exceeding expectations, a more rapid recovery of the real estate sector, and positive spillovers to domestic consumption and investment.

Policy recommendations

To realize its economic growth potential, China must, Amro suggests, intensify its structural reforms to contain and defuse near-term risks and address long-term challenges. Tackling structural and longer-term challenges demands forward-looking policies.

Fiscal policy should continue to support the economic recovery, help create more jobs in the near term and support economic restructuring in the longer term. However, the larger fiscal deficits over the last few years have led to a notable increase in the debt/GDP ratio, Amro shares, hence China should implement fiscal consolidation over the medium term to rebuild its fiscal space. Sustained fiscal consolidation could include phasing out tax relief measures when appropriate, introducing revenue-enhancing measures, and tightening investments of local government financing vehicles (LGFVs).

Mitigating heightened fiscal strains that weaker local governments face requires a multi-pronged strategy, involving coordinated efforts and long-term commitments. There is a need, the report shares, to continue improving the allocation of fiscal responsibilities, revenue sharing and spending between the central and local governments.

Reducing and capping the stock of LGFV debt is a top priority to prevent systemic spillovers to the financial sector. Although strict supervision and oversight of LGFVs are in place, a comprehensive market-based strategy is necessary to facilitate debt restructuring and mitigate debt-related risks.

In this regard, the Chinese authorities have taken a proactive approach that has had significant positive effects. Measures taken over the past year include those that enable local governments to secure refinancing and help the ones facing greater strains to defuse risks related to hidden debt, imminent debt maturities, and debt-servicing burdens. Overall, risks related to local government and LGFV debt are under control.

Monetary and credit policies have been accommodative, Amro finds, and there is room to provide more targeted support to sectors that are still lagging behind in the recovery, such as real estate. While the financial sector is sound as a whole, the report finds, there are pockets of weakness among some regional banks that should be addressed. In particular, some of the rural commercial banks need to strengthen their balance sheets.

Real estate policies, the reports says, should facilitate the sector’s near-term recovery by supporting overstretched yet viable developers, improving market sentiment and mitigating oversupply. Decisive reforms are essential for the sector’s long-term development, including the proper use of funds, prevention of over-expansion, and strengthening of the pre-sale framework of housing units to minimize the risk to buyers of being stranded.

The Chinese authorities, the report states, are confident of achieving high-quality economic growth by intensifying structural reforms and leveraging technological innovations to boost productivity and efficiency. China should also take measures to upgrade its labour force to meet the needs of the new economy, improve the working conditions of migrant workers and strengthen the social security system to meet the needs of the ageing population. These measures will also help boost domestic consumption and its role as a driver of growth.

Amid geoeconomic fragmentation, China should remain committed to adhering to the multilateral rules-based trading system and step up efforts to enhance economic linkages and promote cooperation worldwide, with the Asean+3 region as a key partner. The reprioritization of the Belt and Road Initiative (BRI) to focus on renewable energy and sustainable growth projects is welcomed as it will contribute to the global climate change agenda. The shift, the report argues, will also encourage the renewable energy companies in China to invest in BRI countries and add to global growth. 

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