At the opening session of the National People’s Congress in 2024, Premier Li Qiang delivered his first government work report, proposing the main economic and policy goals for 2024. As widely expected, the GDP growth target is set at “around 5%,” unchanged from last year. The continuity hints at a focus on economic stability. However, without the aid from reopening demand and a lower relative base, the bar for achieving this target will be significantly higher this year.

Months into 2024, the economy still showed an uneven recovery, with concerns about housing market corrections and deflationary pressures still to be addressed to restore private sector confidence. As the economy shifts from a property-led growth model, enhanced support for new economy sectors should help compensate for the slack in the housing market while promoting the government’s pursuit of high-quality growth. In our view, the Chinese economy will be marked by “four imbalances,” “three challenges” and “three opportunities” in 2024.

Four Imbalances

First, nominal GDP growth is abnormally lower than real GDP growth under a deflationary environment. A negative GDP deflator may be a major factor in poor private sector sentiment, as household incomes and corporate earnings are directly related to nominal GDP. If nominal GDP continues to disappoint, achieving the real GDP growth target alone may not be enough to revive the private sector. 

Second, consumer spending remains disproportionately skewed toward service consumption. But in the absence of a significant good consumption stimulus, a broader consumption recovery will depend on higher income growth and improving consumer confidence. But that may take longer to materialize. 

Third, fixed asset investment is primarily led by public investment, while private investment still declined. The bifurcation is driven in part by ongoing policy support to promote the so-called new infrastructure investment (such as new energy vehicle charging stations and big data centres). But property investment, which is largely privately owned, remains a drag. 

Fourth, new economy sectors have significantly outshone old economy sectors. The term “new three products” was born out of the strong domestic and foreign demand for solar cells, electric vehicles and lithium batteries in the context of global green energy transformation. Trade-in schemes to boost sales of “old products” (garment, furniture, household appliances) sales were announced, but more clarity would still be needed with regard to the size and financing of such schemes. 

Three Challenges

First, how can the housing market achieve a soft landing? The policy tone of the housing market has undergone fundamental changes, and the regulatory barrier for home purchases has significantly lowered. But households’ home buying decisions remain complexly influenced by a range of factors, including income expectations, house price expectations or concerns about home delivery. Despite targeted financial support to ensure the delivery of pre-sale homes, property developers are still facing cash flow pressures as home sales recover at a sluggish pace.

Second, how to revive private sector sentiment? A lack of confidence among households, corporates and investors remains widespread. There appears to be no quick fix, but stabilization of house prices, a clear exit from deflation and a more predictable regulatory environment will be the necessary conditions for a rebound in sentiment.

Third, how to pull the economy out of deflationary pressure? Easing destocking pressures on certain products, such as pork and cars, coupled with a low relative base, should pave the way for a moderate return to inflation. But overall weak demand could put it well below the government’s target of around 3%.

Three Opportunities

First, macro policies will remain accommodative, and policy coordination will improve. Fiscal measures will play a leading role, supplemented by monetary support. Although support from the traditional fiscal toolkits (i.e. budget deficits and local government special bond issuance) appears to be modest and little changed from last year, actual fiscal spending is likely to be boosted by special central government bonds issuances, which seek to provide targeted support for strategic initiatives. To support expansionary fiscal policy, monetary policies will also be coordinated to provide a favourable liquidity environment for financing.

Secondly, the government will continue to facilitate the development of new growth drivers to pick up the slack from the housing sector. Digital transformation and energy transition should still stand out given their strategic significance, and ongoing tax and financing incentives towards these initiatives should continue to roll out. 

Thirdly, public housing investment could step up to offset the softness in commercial housing investment. The resumption of the pledged supplementary lending (PSL) program was widely thought to be supporting the so-called “three major projects,” which include public housing and urban village renovation. For an optimistic scenario where these funds are fully used to purchase undeveloped land or unfinished projects from private developers and convert them into public housing, this will help reduce housing inventory and ease cash flow pressure for developers as well.

Junyu Tan, Regional Economist, North Asia, Coface