The China Briefing
Expectations of China’s growth trajectory
China’s growth will likely continue to surpass most Western economies. A range of 3-5% seems likely in the coming years
Please find below our latest thoughts on China:
- Unless something remarkable happens in the next couple of weeks, China’s equity markets are set to record back-to-back down years.
- Combined with a well-documented set of macro and geopolitical challenges, investor confidence has been severely dented both domestically and overseas.
- Investor expectations have completely reversed since the end of 2020 when China’s Covid-free economy was riding high. Indeed, recent market performance indicates it is this year’s macro weakness which is now being extrapolated into the future.
- A key question, therefore, is whether this interpretation is correct, and the causes of China’s economic malaise are due to deep-seated structural issues that will result in a severe and sustained slowdown in economic growth.
Chart 1: China Annual GDP Growth: Target vs Actual
Source: Allianz Global Investors, Macrobond as at 13 December 2023. Note: In 2020 there was no GDP target due to the Covid-19 pandemic. Past performance, or any prediction, projection or forecast, is not indicative of future performance.
- Our view is that while China’s growth will certainly be lower in the future than the past, nonetheless it will likely continue to surpass most Western economies. A range of 3-5% seems likely in the coming years.
- In the near term, China undoubtedly has a growth challenge. The annual Central Economic Work Conference (CEWC) took place this week. It is chaired by President Xi and is a forum where senior policymakers set the economic policy outlook for the coming year. This includes agreeing a closely watched economic growth target.
- China’s annual GDP growth targets typically don’t move by more than 0.5% from year to year. This year’s target was "around 5%".1 And given the tone of the CEWC, where more weight has been given to growth than other policy goals, it seems most likely that the 2024 target will be around 4.5-5%.
- Although the growth target is not officially unveiled until March, in practice we should get a good indication before this, as each province will release its own growth target in January and February.
- The other notable feature of China’s growth targets is they are rarely missed. It happened in 2022 due to Covid and policymakers will be determined, just as they have been this year, to make sure this is not repeated.
- However, with the property sector drag persisting, and consumer and business sentiment being weak, growth next year would almost certainly slow sharply without a policy offset.
- Indeed, it is very likely that policy support will need to be larger in 2024 than it has been this year. The government will have little choice but to do more.
- China has historically been very cautious with fiscal policy, and has rarely delivered a budget with a forecast deficit of more than 3% of GDP. This has happened only twice in the past two decades – in the pandemic years of 2020 and 2021.2
- Therefore the recent, and very unusual, decision in late October to increase the fiscal deficit to 3.8% by issuing RMB 1 trillion of central government bonds to fund infrastructure projects is a likely signpost for how policy will evolve in the new year.
- Beyond the tried-and-tested fiscal levers, the government will also need to take additional action to offset the biggest drag on the economy, which is the collapse of housing sales.
- This is because, while China will continue its drive to build high-tech industries, there is a timing issue. The favoured growth sectors of the future, even bigger ones like electric vehicles, are simply too small to offset the rapid decline in the property sector.
- The negative narrative on China, in our view, also fails to take into account some of the longer-term growth drivers which are being masked by the current downturn.
- The catch-up potential, for example, remains very big – China’s per capita income is less than 20% of the US.3
- Consumer spending has been sluggish this year. But this is less a structural issue and more because the government did not offer financial support to households that lost incomes or jobs during Covid.
- In our view, therefore, while China’s structural problems are very real, extrapolating the current bout of economic weakness as the new status quo is nonetheless likely to be as misguided as the unbridled optimism just three years ago.
- Just as expectations about China’s trajectory have flipped before, so they can change again.
1 Source: China sets GDP target of 'around 5%' for 2023, CNBC, 4 March 2023
2 Source: Gavekal, 8 November 2023
3 Source: Gavekal, 30 November 2023