China’s economy faces a ‘critical year’ in the fight against deflation

Kent Wong, the head of China’s largest jewelery retailer, knows exactly what consumers are doing in the world’s second-largest economy, and they are wary.

Wong, Chow Tai Fook’s managing director, said the chain’s customers are shifting away from diamonds and other precious stones to gold, a store of wealth in tough times. “In the short term, people will continue to be more cautious no matter what.” [whether it’s] Spend or invest?” he said, adding that he expected consumer confidence to recover within a year or two.

Wong’s subdued outlook for 2024 is shared by many analysts as policymakers in Beijing fight to restore the economy’s animal spirit and escape the threat of a debt-deflationary spiral. , comes as we brace ourselves for a decisive year.

The government is expected to announce on Wednesday that gross domestic product (GDP) grew at about 5.2% last year, according to a Reuters poll of analysts. This would be slightly above the official target of 5%, but economists said 2024 is expected to be even more difficult, with the same poll predicting growth will slow to 4.6%. Ta.

The real estate slump is entering its third year, exports are weak and cautious investors are staying away from China’s financial markets, with Morgan Stanley analysts saying China’s 1997-98 Policymakers are battling deflationary pressures, the longest since the Asian financial crisis.

“I think this is an important year for the Chinese economy in the sense that deflation could enter a vicious cycle,” said Robin Xin, chief China economist at Morgan Stanley.

Singh said companies are starting to reduce debt and cut back on capital spending and hiring amid a tough job market and worsening salary expectations. “We need very meaningful policy efforts to break that cycle,” he said.

Analysts expect the annual meeting of the rubber-stamp parliament, the National People’s Congress, to be held in early March and again set an economic growth target of about 5%.

Although strong compared with developed countries, China’s target last year was the lowest in decades. After tough lockdowns hit the economy in 2022, analysts said it should have been easy to achieve, but growth faltered in the middle of the year and the government was forced to step up fiscal support.

Hui Xiang, chief China economist at Goldman Sachs, said the base effect compared to 2022 would likely have been about 2 percentage points higher than China’s gross domestic product growth rate last year.

Analysts said, just like last year, the real estate sector will be the biggest uncertainty facing the economy in 2024. The government has announced several initiatives, most recently revealing that the central bank had injected 350 billion yuan ($49 billion) into banks in December through a scheme known as “committed additional financing.”

The purpose of the loan was not disclosed, but analysts expect it will be allocated to the “Big Three” stimulus program to support the homebuilding industry.

Chris Bedore, Gabekal’s deputy director of China research, said the plan could be enough to remove the moribund construction floor, but there would be more unknowns about property sales. China’s real estate sales in December were still only 60% of pre-pandemic 2019 levels in 30 major cities.

Bedore said if the real estate crisis worsens, authorities could be forced to launch a “bazooka” stimulus package that would shock the market. But he added that the basic scenario is stabilization, not rebound. “We’re going to see a fairly gradual recovery this year. In other words, at least things will stop getting worse,” he said.

Economists argued that beyond the real estate sector, a broader stimulus package with reforms was urgently needed to revitalize the economy.

“Deflation is very worrying for a country like China, which is accumulating public debt at a faster rate than Japan,” said Alicia García Herrero, chief economist for Asia Pacific at Natixis. Under deflation, prices and wages fall, but the value of debt does not fall, so the burden of repayment increases.

Morgan Stanley’s Singh said the central government needs to provide fiscal policy that targets consumption rather than increasing investment in manufacturing. This could benefit China’s hundreds of millions of migrant workers, for example, by providing them with greater access to social security and reducing their incentive to save rather than spend.

“We need a drastic shift towards fiscal easing,” Singh said. “Size matters, of course, and so does speed. If policy continues to move downwards, it could ultimately lead to even greater policy demands to break out of this debt-deflation trap.”

Economists argued that exports, which shrank in dollar terms last year, could not be relied upon to rescue the economy given weak global demand. China’s economic stimulus package, which prioritizes increased state-run bank lending to manufacturing, has led to overcapacity and increased friction with trading partners such as the European Union.

Despite market calls for Beijing to ease policy, and China’s own efforts to put on a friendly face for investors, analysts say policymakers continue to send mixed signals. Stated.

The People’s Bank of China kept its key lending rate unchanged on Monday despite market expectations for rate cuts. The government shocked investors last month when it announced tougher regulations for video games, after giving reassurances that the tech crackdown was over.

The government tried to calm concerns by firing the person responsible for drafting the rules, but analysts said the damage had been done.

Considering all this, economists say achieving this year’s 5% GDP growth target will be ambitious. Goldman’s Xiang said the government needs to reduce the impact on the real estate sector, take more expansionary fiscal measures and “bring good fortune to exports.”

“If the government really wants to, it will find a way to reach 5% one way or another. But it will be a difficult task,” Shan said.