Economy Remains Weak, Debt Concerns are Casting Doubts on Government Support

04 February 2024 / Report

Trusted Insights for What's Ahead™

Status of China’s Economy – The Chinese economy grew 5.2% in 2023, in line with our forecast. December and Q4 data offered no tangible upside to our current growth outlook for 2024 (currently at 4.1%). While government support picked up speed in late 2023, authorities kicked off the new year with measures targeted at reducing debt risks, including the pausing of infrastructure and construction projects in 12 highly indebted provinces. Although likely beneficial longer-term, this shift in policy direction can dampen short-term growth and exacerbate market uncertainty.
Investment Trends – Growth in fixed asset investment (FAI) remained stable in December, with full-year growth at 3%. Extra stimulus supported infrastructure and manufacturing investment growth in late 2023, but the stop order on infrastructure projects will likely hobble investment in Q1; at a minimum, it is clouding the near-term investment outlook until more details on the measures emerge. Real estate investment growth will also continue to be a major drag.
Consumption Trends – Retail sales growth moderated in December (7.4% y-o-y vs 10.1% in November), as favorable base effects faded. In 2024, consumption growth will depend largely on improvements in income growth and labor market conditions, as well as a recovery in consumer confidence. Given the slow growth in household income and continued weak hiring intentions throughout most of 2023, along with the ongoing property downturn, there is little reason to expect strong consumption growth in the coming months.
Trade Trends – Export growth improved further in December, increasing 2.3% y-o-y, and up from 0.5% in November. Despite this, we don’t see much upside for export growth in Q1, with headline growth no longer benefitting from favorable base effects. The manufacturing PMI’s new export orders sub-index remained below the 50-mark in December, further pointing to weak expectations for export growth. Given the global economic slowdown and heightened geopolitical risk, we expect external demand for China-made products to continue moderating in the next few months.
Implications for Business – Our broader outlook for business remains unchanged. China’s ongoing economic woes are underpinned by deep-rooted structural imbalances that will take time to address, and which the government is not interested in exacerbating. In line with the 2023 Central Economic Work Conference, stimulus will likely remain targeted and moderated. We currently assume an operating environment defined by weak aggregate demand due to the property downturn, softer private consumption, downgraded spending, and moderating external demand.