China announced on October 18, 2023 that its economy grew by 4.9% in the third quarter, and the cumulative economic growth rate for the first three quarters of the year is 5.2%. Since the base period of the fourth quarter last year was lower, the economy is expected to grow by 4.4% this fourth quarter, and the economic growth rate for 2023 could reach the 5% target. Now that China’s economic growth in the third quarter is better than market expectation, this article will further analyze China’s economic outlook and challenges in 2024.
As a result of the recovery from the epidemic, China’s overall consumption growth in early 2023 was strong, with food and beverage consumption growing by more than 10%. However, despite the rapid recovery of the consumer market, people’s consumption power and willingness to consume have not yet recovered, and the growth of total retail sales of consumer goods has rapidly declined from a two-digit growth to a single-digit growth since June 2023. The strength and sustainability of the domestic demand and consumption dynamics still remains to be observed. Fortunately, during the Mid-Autumn Festival and the National Day Golden Week holiday saw a 71.3% growth in tourist arrivals, leading to a 129.5% growth in tourism revenues. The Ministry of Culture and Tourism of the People’s Republic of China (PRC) stated that both the arrivals and tourism revenues were higher than the pre-2019 level. This indicates that there are signs of recovery in tourism consumption, which in turn drove the total retail sales of consumer goods in September 2023 to grow by 5.5% year-on-year, and total retail sales of consumer goods in the first three quarters of the year to grow by 6.8% year-on-year, with retail sales of commodities growing by 5.5% and food and beverage consumption growing by 18.7%. In total, the contribution of consumer spending to GDP growth in the third quarter of 2023 was 94.8%, boosting GDP growth by 4.6% in the third quarter, and 83.2% in the cumulative first three quarters, boosting GDP growth by 4.4% in the first three quarters, which shows that domestic consumption has made a significant contribution to the economic growth of China this year.
Looking ahead to next year, various forecasting institutes have predicted that China’s economic growth in 2024 will be weaker than that in 2023, such as the World Bank and OECD, which lowered China’s economic growth rate in 2024 from 4.8% to 4.4%, and from 5.1% to 4.6% respectively this September. While the latest forecast released by the International Monetary Fund on October 18 indicated that China’s economic growth in 2023 could reach the target growth rate of 5%, it has pointed out that in 2024, due to the downward pressure on the real estate sector and the weakening recovery, the economic growth in 2024 will be further reduced to 4.2%.
China’s Real Estate Development Prospect Index (REDPI) has been rising continuously for 4 months since January 2023, and then turned into a downward spiral since May. Although the housing market has been stimulated by the “home recognition and loan recognition” policy, the sales of business and commercial properties in the first 9 months of the year still dropped by about 15%, the sales of residential properties in the same period dropped by 6.3%, and the area of housing to be sold increased to as high as 18.3%. This indicates that it will take some time for China’s real estate to restructure.
In view of the fact that the restructuring of China’s real estate sector is closely related to local governments’ finance, the PRC Standing Committee of the National People’s Congress resolved on October 24th to issue an additional RMB 1 trillion in national bonds, which will be allocated to the local governments in the form of transfer payments and the local governments will be allowed to utilize 60% of the bonds in advance of the year 2024 for the purpose of post-disaster reconstruction, disaster and flood prevention projects in eight major areas. The PRC State Council has stipulated that the debt growth rate of financing platforms in high-risk local governments such as Tianjin, Chongqing, Liaoning, Jilin, Guizhou and Yunnan must be less than the average growth rate of enterprise loans in the province, and that loans can only be made to major projects and key areas approved by the State Council, in addition to the payment of interest on the debt, in order to restrict the use of funds to minimize the risk of the continuous accumulation of the local debt.
In addition to the local governments in the throes of adjusting their financial structure as a result of the housing market, another key to the stable growth of China’s economy in 2024 lies in the confidence of foreign investment. While there is 37.5 trillion RMB of fixed asset investment in China in the first nine months of 2023, a growth of 3.1%, it was mainly due to the growth of state-owned enterprise investment by 7.4%, while private investment still declined by 0.6% of the same period, indicating a sluggishness in private investment. Although fixed asset investment by foreign enterprises grew 1.7%, fixed asset investment by Hong Kong, Macao and Taiwan enterprises continued to decline by 2.6%. With the raging Russian-Ukrainian and Israeli-Palestinian wars, the world as a high interest rate environment, and the sluggishness of global demand, the desire for cross-border investment is weak. Thus, retaining foreign investment under the US-China competition and further increase the incentives for the stationing of foreign investment may be the most urgent task for China to maintain its targeted economic growth.
In short, China’s economic growth in 2024 is expected to reach 4% to 4.5%, and still remains as one of the major global economic growth engines. However, it is undeniable that China is now facing a period of economic restructuring after the epidemic. After domestic consumption becomes the key factor for economic stabilization in 2023, some time will be needed to adjust the interlocking problems of the real estate market and local finance in the medium to long term. The PRC State Council has put forward the “Opinion on Further Optimizing the Foreign Investment Environment and Increasing the Attraction of Foreign Investment” in the hope of stabilizing the market and optimizing the environment for foreign investment, and whether or not this will stabilize foreign investment will be an important indicator of the future observation of medium to long term economic growth in China.
(Tan, Ching-Yu, Director, Research Division IX, Taiwan Institute of Economic Research)
(Translated to English by Chen Cheng-Yi)