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China in Focus: Five key macro themes for 2024

22 Jan 2024

Key takeaways

  • We anticipate a soft landing for property in 2024; social housing to offset weakness in the broader real estate market
  • Fiscal policy will lead the way; enhanced coordination between policymakers to smooth structural transitions

China data review (December, Q4 2023)[@source-wind-hsbc]

  • Real GDP growth climbed to 5.2% y-o-y in Q4 2023, with full-year growth reaching 5.2%, meeting the official government growth target of “around 5%”.The economy ended 2023 mixed: inflation remained weak, exports improved,and financing data continued to highlight lacklustre bank lending. Property remained the most challenging sector, while consumption was a key growth driver and manufacturing remained a key supporting factor in investment.
  • Industrial production gained more traction in December picking-up 6.8% y-o-y on the back of a rise in domestic demand. Manufacturing activities outperformed, led by auto production, which rose 20.0% y-o-y. Meanwhile, other high-end technology activities also maintained momentum – electrical machinery rose 10.1% y-o-y and computer & communications 9.6% y-o-y.
  • Retail sales growth slowed to 7.4% y-o-y in December as the favourable base effect faded, with property-related goods still the major laggard. Services-related sales remained the bright spot. Over the course of 2023, services consumption revived amid normalised offline activities, and services-related retail sales rose 20.0% y-o-y. Notably, restaurant & catering sales maintained double-digit growth in every month and rose 37.7% y-o-y in December.
  • Headline CPI inflation dropped by 0.3% y-o-y in December, with the main drag continuing to stem from food and energy prices. Pork prices (-26.1% y-o-y) led the overall decline in food prices (-3.7% y-o-y), while softer global oil moved energy prices lower. However, core CPI remained steady at 0.6% y-o-y amid a pick-up in consumption demand, as both tourism, and entertainment and culture prices moved higher.
  • Exports grew 2.3% y-o-y in December, boosted by a low base. By region,exports to the US, the EU and ASEAN contracted but picked up to Africa and Latin America. By product, auto exports were the stand out, rising by 52% y-o-y.Imports, on the other hand, reverted to positive growth of 0.2% y-o-y, supported by ordinary imports, given a pick-up in domestic demand, and rising key commodity imports on the back of resilient infrastructure investment.

Five key macro themes for 2024

As we enter 2024, China’s economy will require strong policy support, led by fiscal measures, to keep traditional growth engines, such as housing and infrastructure, ticking over, while helping new growth areas to accelerate. This approach will help to sustain consumption momentum into the coming quarters. We highlight five macro themes that will support GDP growth in 2024.

1. A soft landing for the property sector

New dual-track policy model to absorb oversupply

Our base case is for a soft landing for China’s housing market in 2024. The new dual-track policy model – which aims to supply more social housing, while facilitating healthy development of the commercial real estate sector – should absorb oversupply and help the broader property sector rebalance. Policymakers have also shown their willingness to support the housing market, as reflected by the RMB350bn injection of financing last December.

2. Resilient consumption to benefit the wider economy

Consumption to drive over two-thirds of GDP growth

Consumption has been the driving force of the economic recovery, contributing c80% of GDP growth in 2023; we expect this robust growth to continue in 2024. The stabilisation of the housing market should boost consumer confidence, while the country’s recent move to prioritise social welfare has the potential to further unleash consumer spending. We believe resilient consumption will continue to drive more than two-thirds of the growth in GDP.

3. Enhanced policy coordination

Policy coordination and fiscal stimulus driving growth

China has ramped up policy support since 4Q23, with one particularly positive development being the emphasis on better policy coordination. Fiscal policies will lead the way, with the central government playing a bigger role, which we think represents a major shift in strategy.Furthermore, the broadly defined fiscal deficit may reach c8%, similar to 2023 levels, while the central bank will likely further cut the reserve requirement ratio to keep liquidity ample.

4. New economy to shine; old economy to tick over

Policy support will allow old growth engines to tick over

Despite promising developments in the “new economy”, especially on the electric vehicle front,we think the scale is still too small to offset the slowdown of the old growth engines, such as manufacturing, infrastructure and property. However, growing support for property and local governments will allow the old engines to tick over, leaving room for the new drivers, like electric vehicles, lithium batteries and solar cells, to flourish, backed by favourable policies.

5. Emerging from the shadow of deflation

Food should be less of a drag on inflation in 2024

Although China’s GDP deflator stayed in contractionary territory for most of 2023, we are cautiously optimistic that it can turn positive in 2024. Volatile components like food have weighed on consumer price index (CPI) inflation but should be less of a drag in 2024.Commodity prices also face upside risks against a backdrop of heightened geopolitical tensions and the potential stabilisation of the domestic housing market.

Source: Refinitiv Eikon
Past performance is not an indication of future returns Source: Refinitiv Eikon. As of 17-Jan-2023 market close

Related Insights

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