Time to Rebalance

Despite a stronger than expected rebound in the Chinese economy in the third quarter of 2023, there is still concern about its medium- and long-term growth, said economists attending the International Finance Forum (IFF) 20th Anniversary and Annual Meeting 2023 held in Guangzhou, Guangdong Province in late October. They called for more policies and reforms to mine the growth potential, boost market confidence and to provide substantial support for the private economy. 　

In September, the Purchasing Managers’ Index (PMI) for industrial sector climbed above the crucial 50 percent level that indicates expansion rather than contraction, measuring 50.2 percent, for the first time since April, indicating improved manufacturing conditions. The profits of industrial enterprises above designated size (with annual sales revenue surpassing US$2.8m) saw positive growth of 17.2 percent in August, indicating recovering market demand. 　

The unemployment rate in the first three quarters dropped 0.3 percentage points to 5.3 percent, from the same period of 2022. Improving on a monthly basis, the average unemployment rate dropped from 5.3 in July to 5.0 in September. 　

“There are evident signs indicating that the economy is continuing its general recovery,” said NBS official Sheng Laiyun at a press conference held in October in Beijing. “Our preliminary estimate is that China could realize its 5 percent growth goal in 2023 as long as fourth-quarter growth reaches 4.4 percent.” 　

“Many of the recent data indicators point to somewhat less negative growth momentum, at least. We’ve seen the government step forward with both monetary and fiscal stimulus,” observed Eswar Prasad, senior professor of trade policy at Cornell University, at the IFF. Prasad said he is more worried about China’s medium- and long-term growth. 　

China alone is projected to contribute more than 30 percent of global growth this year, Kristalina Georgieva, managing director of the International Monetary Fund, said via video at the IFF. 　

In July 2023, China rolled out policies to stimulate big-ticket household and service consumption and encourage private investment. Many places adjusted property purchase policies, including loosening the limit on how many apartments can be owned and reducing mortgage down payments. 　

Some policies are taking effect, said experts at the IFF. “The rebound is obvious, seen from some near-term indicators and high frequency data,” noted Ding Shuang, chief Greater China and North Asia economist at Standard Chartered Bank, citing the improvement in new export orders in the previous two months and the uptick in the producer price index (PPI), an indicator of enterprise profitability and inflation. 　

“The economic recovery will be tortuous, as the meeting addressed,” said Zhang Yansheng, chief expert of the China Center for International Economics Exchange, at the IFF forum, citing the pandemic, the difficulties in economic transformation and upgrading, and external challenges. 　

There is a contrast between improved economic performance and lingering bearish investor market sentiment, which Ding said “reflects not only disappointment over the lack of large-scale stimulus [policy], but also worries over the medium-term and long-term growth potential.” 　

“Risks and factors remain that may cause economic difficulties, particularly the slump in the property sector, which doesn’t look like it will bottom out in the short term,” Ding said. He added that low inflation and low prices, which could lead to low profit margin of enterprises, will affect market mood across the board. 　

In the first three quarters of 2023, real estate investment dropped 9.1 percent, while the sales area of commercial housing fell 7.5 percent year-on-year, continuing to drop for five months in a row after a short-lived rise at the beginning of the year. 　

“There are legitimate concerns. If the property sector is going to precipitate the financial crisis in China, I think there is a lot of trouble ahead,” noted Prasad. Then he said he thinks the government still has enough tools to manage the problem without setting off a real financial crisis. 　

Local government debt, partly caused by the crashed property market that cut local income from land rents, may also drag down growth if not handled properly, experts said. 　

Zhang Yansheng said it might be a big challenge to achieve 5 percent GDP growth next year. “Challenges lie in insufficient domestic demand, local government debt, infrastructure investment and the transformation from traditional to new development drivers,” Zhang noted. 

In the three years under zero-Covid, average spending per capita increased only 2.8 percent, lower than the growth in per capita disposable income of 4.3 percent, according to Zhang’s figures. 　

In the first three quarters of 2023, household savings increased 14.42 trillion yuan (US$1.98t), a rise of 2.51 trillion yuan (US$344.31b) over the first two quarters, according to data from the People’s Bank of China. 　

In the third quarter, investment contributed 29.8 percent of economic growth while net exports dragged growth by 0.68 percentage points. Zhang noted the increasing difficulties of stabilizing foreign trade. 　

“External demand is shrinking in general, while the complicated geopolitical situation has resulted in declining exports to the US, EU, Japan and South Korea,” Zhang said. “We need to deepen reforms and open wider to the outside world to help stabilize foreign trade and investment.” 　

He pointed out the challenges associated with a new international environment. “In the past 40 years, China developed in an environment of globalization, under the push of a revolution in new science and technology, and in a global village where big countries could cooperate. But that has fundamentally changed,” Zhang said. 　

In 2022, China’s R&D investment surpassed 3 trillion yuan (US$411.4b) a year-on-year growth of 10.1 percent, double-digit growth for the seventh year in a row, according to the NBS data. 

Prosperous provinces and cities including Beijing, Shanghai, Tianjin, Guangdong, Jiangsu and Zhejiang have become innovation-driven, while some provinces are turning from investment-driven to innovation-driven, Zhang said. 　

China seized the opportunity to develop digital technology that allowed it to leverage the green and new energy revolutions. 　

“Electric cars, photovoltaic products and lithium batteries are the new export and growth points for Chinese economic growth,” Zhang said. 　

He called for more reforms and positive fiscal and monetary policies for the fourth quarter and next year. “China needs a package of policies that includes both short-term stimulus and mediumterm restructure adjustment and long-term institutional reforms,” Zhang said. 　

Yu Xiangrong, chief China economist of Citibank, believes it is necessary to keep a high fiscal deficit ratio of 3.8 percent to signal further fiscal expansion. 　

But Ding Shuang is more guarded over stimulus. At the end of September, China’s outstanding social financing for enterprises totaled 372.5 trillion yuan (US$51.1b), a year-on-year growth of 9 percent. “It is much higher than GDP growth. Monetary policy is already comparatively loose,” Ding said. 　

“At a time when the economy is starting to rebound, strong stimulus might not be the right approach. It may cause long-term reliance on stimulus measures to boost the economy,” he said, stressing that it is more important to carry out structural reforms in a relaxed macro-economic environment. “The ultimate goal is to restore the confidence of private companies and household consumption.” 　

Song Min, former dean of the Economics and Management School at Wuhan University, agrees that using consumption to boost growth is not a long-term option. “It usually happens when there is excessive production capacity. In these circumstances, stimulating consumption can bring about short- term growth or change. Long-term economic growth relies on capital accumulation or technological innovation. Ultimately, it’s about innovation. China has come to the stage [of using technology to boost growth],” commented Song in a group interview at the IFF. 　

By the end of May 2022, the number of registered private enterprises amounted to over 50 million, 3.7 times that of 2012, and accounted for 92.4 percent of all Chinese enterprises, according to the State Administration for Market Regulation. 　

Eswar Prasad showed concerns over weak private investment and stressed the crucial role the private economy plays for China. 　

“What the government needs to do essentially is to make sure that there is a good enabling or facilitating environment for the private sector to do well. This means the consistency of macroeconomic policies so that the government provides the right sort of stimulus, but more importantly, provides a clear signal to the private sector that success in the private sector will be welcomed,” Prasad said. “Now, actions definitely speak louder than words.” 　

Ding agrees. “It’s important to let people know getting rich is something to be proud of. It’s an important experience behind China’s success,” Ding said. 　

The IFF Global Finance and Development Report 2023 released during the 20th anniversary meeting of the IFF projects the Chinese economy to grow 5.2 percent in 2023 and 5 percent in 2024. 　

“The forecast is more optimistic than that of many international institutions, but we think it’s an achievable goal,” said Song Min who participated in writing the IFF report. 　

As for pessimism over the property sector, Song said that China has not finished urbanizing, so the doom is jumping the gun. Selling excess housing stock cheaply could incentivize workers to come to smaller cities, as well as developing satellite cities around big metropolises. 　

“The next step for the property sector is probably to narrow the supply-demand gap. Urban village renovation, public housing renovation and providing low-income housing could help increase demand and stabilize prices,” Yu said. 　

He believes it is necessary and possible for China to maintain a 5 percent growth in 2024, which “will send a strong message to the market, private enterprises and the household sector that building the economy is still the central task.” 　

“In the long run, China is increasingly paying attention to high-quality growth, instead of gaining rapid growth through investment in the property sector or infrastructure. This is in line with China’s growing investment in high technology and the green economy,” Ding said.