Se Yan[1]
On March 14th, the Guanghua School of Management and the Institute of Economic Policy at Peking University co-hosted an economic situation and policy analysis panel following the conclusion of the 2024 Two Sessions (the Annual Sessions of the National People's Congress and the National Committee of the Chinese People's Political Consultative Conference). Ten scholars from the Guanghua School of Management engaged in discussions on a variety of topics, including "Macroeconomic Analysis and Key Growth Issues," "Addressing Challenges in New Quality Productivity," and "Building a Financial Powerhouse with Strengthened Risk Management." The panel discussion provided insights derived from the Two Sessions, conducted an in-depth analysis of the current economic landscape, and deliberated on prospective policy directions.
Overview
Consumption, infrastructure investment, and exports are expected to gradually recover throughout 2024, though reversal of the downward trend of the real estate industry remains uncertain.
The annual economic growth rate for 2024 is anticipated to reach approximately 5%. However, the Chinese economy continues to face several risks, including insufficient domestic demand, a declining real estate industry, and an unstable external environment. Achieving the GDP growth target will necessitate significant policy efforts.
Recommendations include boosting consumer spending by increasing household income and stabilizing household wealth, addressing both demand and supply-side issues to revitalize the real estate market, maintaining stock market stability, and stabilizing foreign investment and trade.
I. Review of 2023 and Economic Outlook for 2024
1. Review of China's Economic Development in 2023
In 2023, China’s economy demonstrated stable growth with a real GDP growth rate of 5.2%, surpassing the growth target. However, issues of insufficient consumption and investment still warrant attention.
The problem of insufficient consumption remains prominent. Although the low base effect boosted the year-on-year growth rate of total retail sales of consumer goods in 2023, the two-year average growth rate remained low. This issue stems from several factors: declining housing and stock prices have reduced household wealth; the growth rate of household income has generally declined in the post-pandemic period, especially among low-income groups, leading to a further widening of income disparity; and consumer confidence has remained low compared to the past.
Insufficient domestic demand has resulted in subdued investment. From January to December 2023, fixed asset investment grew by 3.0% year-on-year, a decrease of 2.1 percentage points from the previous year's growth rate. Infrastructure investment growth slowed, with fixed asset investment in infrastructure increasing by 8.2% year-on-year, a decrease of 3.3 percentage points from the previous year; the real estate sector continued its downward trend, with real estate development investment decreasing by 9.6% year-on-year, a decrease of 0.4 percentage points from the previous year.
2. Economic Outlook for 2024
Based on information and policy signals from the first two months of 2024, consumption, infrastructure investment, and exports are expected to gradually recover throughout the year, though reversal of the downward trend of the real estate industry remains uncertain.
Consumer demand during the Spring Festival indicates a slow recovery in annual consumption. Box office revenues during the Spring Festival set a new record for the holiday season; the number of tourists and tourism revenue exceeded the levels of the same period in 2019. The recovery in Spring Festival consumption slightly increased the CPI in February. Notably, the cost of tourism in February witnessed a 23.1% escalation year-over-year, marking the most substantial increase since records for this indicator commenced in January 2002.
With fiscal policy efforts, infrastructure is expected to rebound in 2024. The resolution of local government debt and the issuance of special government bonds in 2023 have created room for fiscal policy efforts in 2024. The issuance of 1.4 trillion yuan in special refinancing bonds effectively resolved short-term local debt risks; additionally, 500 billion yuan of the 1 trillion yuan in special government bonds was rolled over to 2024, providing financial support for further fiscal policy initiatives.
According to information released from the Two Sessions, fiscal policy is expected to sustain its robust strength throughout 2024. The deficit ratio is planned to be set at 3%. Additionally, 3.9 trillion yuan in local government special bonds are slated for issuance, marking an increase of 100 billion yuan from the previous year. Furthermore, 1 trillion yuan in ultra-long-term treasury bonds are planned to be issued annually for several consecutive years starting this year, dedicated to implementing major national strategies and constructing key security capabilities.
Exports grew faster than expected in the first two months of 2024. Against a low base, China’s exports increased by 7.1% year-on-year in January-February 2024, surpassing expectations. By region, exports to Africa, Russia, ASEAN, and Belt and Road countries showed higher growth rates in this period.
However, commodity housing sales were weak in the first two months of 2024, and real estate companies still face liquidity risks. The transacted area of commodity housing in 30 large and medium-sized cities fell by 40.2% year-on-year. For real estate companies, external financing channels remain constrained, with bank loans and bond financing shrinking. Concurrently, the decline in commodity housing sales has led to a continued reduction in cash flow from sales.
The economic growth rate in the first quarter of 2024 is projected to be between 4.5% and 4.8%. With the recovery in domestic consumption and export figures, both domestic and external demand have improved, indicating stable growth in the first quarter. The annual economic growth rate for 2024 is anticipated to reach approximately 5%. However, the Chinese economy continues to face several risks, including insufficient domestic demand, a declining real estate industry, and an unstable external environment. Achieving the GDP growth target will necessitate significant policy efforts.
II. Policy Recommendations under the Current Economic Situation
1. Boosting Consumer Spending by Increasing Household Income and Stabilizing Household Wealth
Expanding household income through various channels is crucial. Equally important is the stabilization of housing and stock prices to bolster household wealth.
2. Revitalizing the Real Estate Market by Simultaneously Addressing Demand and Supply-Side Issues
On the demand side, it is recommended to gradually relax restrictions on the purchase of commercial housing in core areas of first-tier cities, while ensuring the supply of public housing. Monetary policy should continue to promote the reduction of mortgage loan interest rates to alleviate the pressure of home purchases on households. On the supply side, one approach is to utilize debt restructuring practices, whereby the government, the China Development Bank or the China Construction Bank, acquire excess land reserves from real estate companies through structured transactions for the development of public housing, especially rental housing for low-income households. Another approach is to establish a national “Real Estate Stabilization Fund” through coordination by the central bank, the Financial Regulatory Administration, and the Ministry of Housing and Urban-Rural Development, to purchase unsold commercial housing and convert it into rental housing or long- term rental apartments.
3. Boosting the Stock Market
In the event of severe stock market fluctuations, it would be advisable to increase the flow of capital into the market to maintain stability.
4. Stabilizing Foreign Investment and Trade
To stabilize foreign investment, it is necessary to establish a stable policy environment to reduce market uncertainties and encourage foreign investors to make long-term plans and decisions. To stabilize foreign trade, it is also crucial to prevent "decoupling" from major developed country markets while seizing opportunities to continuously expand exports to developing countries.
[1] Dr. Se Yan is an associate professor of applied economics at the Guanghua School of Management, Peking University.
