Where is the Chinese economy heading in 2024?

It’s been a roller-coaster of a year for China. From a growth perspective, the economy looks set to deliver around 5% real GDP growth in 2023, which is respectable, but slower than the pre-COVID period. The property sector slowed further, which had a negative spillover into some financially weak local governments and raised financial stability concerns over the summer. While headline real growth of around 5% is in line with the official target, nominal GDP growth is lower at around 3.5%, reflecting the problematic deflation the economy continues to face. Throughout the year, markets had repeatedly hoped for a change of mind from Beijing in the form of significant policy easing, which was not delivered. As we take stock in mid-December 2023, MSCI China looks set to end the year with double-digit declines, the domestic A-shares market is down 3%, and the RMB is 4% weaker versus the USD against a sea of positive gains in other countries and regions. 

Over 2023, many events that were initially seen as potential turning points ended up disappointing. First it was ending Covid Zero, which did not spark as much of a rebound as hoped. Later in the year it was the relaxation of real estate restrictions, which failed to prevent the property crisis from worsening. The annual Central Economic Work Conference (CEWC), which concluded on Tuesday, presented another potential turning point to reset the policy direction. Instead, policymakers sent a clear message that policy is largely staying the course – the focus will likely remain on transitioning the growth model away from the property sector, while concurrently focusing on financial stability by providing swift support for local governments. There was a nod to the weak links in the economy, such as weak demand, financial stability concerns and poor execution or transmission of policies. It appears that fiscal policy will take the baton from monetary policy next year in terms of ensuring a reasonable pace of economic growth.

On property market policies, the stance does not appear to have changed all that much. Top of the agenda is trying to defuse the liquidity crunch still faced by many developers. After repeated pledges and little follow-through, it will remain to be seen whether policy will be more forceful and effective next year. The language around local government fiscal issues appears to be much more conciliatory, and suggests that there will not be a credit event. Instead, the central government will likely play a key role in the extension, refinancing as well as restructuring those debts. 

Overall, the policy signals are more or less in line with our expectations. Big stimulus isn’t on the cards, but policymakers will potentially be vigilant to stamp out any risks to financial stability. Policymakers remain focused on finding new growth drivers through innovation and moving up the value chain. There will likely be more broad-based investment into the digital economy, AI development, and green technologies. These sectors could remain focus areas for the government and are seen as future drivers of growth, but it remains an open question whether industrial policy will be successful as the economy becomes more complex. 

More fiscal expansion (after holding back in 2023) and a greater focus on policy effectiveness means our growth forecast of 4.3% real GDP growth is achievable (see Chart). However the risks of this policy mix are the different time lags between the slowing and growing sectors. For instance, the favored growth drivers of the future are simply too small today to offset the damage from the significantly shrinking property sector. The time required to build high-tech industries means this policy cannot also double as a short-term stabilization plan. The government is willing to support favored sectors through industrial policy, but more thorough economic stabilization could require broad-based support of aggregate demand, which would require unfavorable sectors to also see support. The balance of Chinese policy is clearly tilting toward more support for demand, but without more forceful stimulus of “old economy” sectors, it’s hard to expect a major acceleration in nominal growth.

For investors, the backdrop for China assets will likely still be challenging next year. In the equity market, investors’ low expectations on new policy stimulus from the CEWC meant the market responses have been relatively muted. “Stability” is the key word in 2024, and this could translate into lower margins or ROE for Chinese banks. The outlook for Chinese banks stays clouded given macro pressure, earnings slowdown and contagion risk from property bond defaults against very strong reserve positioning. Policies encouraging innovation and supporting the digital economy bolster our positive view on large cap China internet stocks, especially after the recent correction. Some of these names are now trading close to last October’s lows, yet earnings visibility into 2024 remains reasonably high. Given the lack of new measures, we stay cautious on the property sector until we see a meaningful improvement in developers’ liquidity condition and/or primary sales. While a massive consumption stimulus package appears unlikely, selective sub-sectors such as semiconductors, tourism, new energy vehicles, and automation, will likely receive targeted support measures. Overall, the CEWC is a non-event for equity investors. Valuations for Chinese equities are now one standard deviation below the near-term average. However, it may continue its bottom-searching process for the rest of the year as investor confidence (and liquidity flows) remain weak. Continued earnings recovery into 2024 (JPM PB MSCI China 2024 EPS growth 9-10%) could provide comfort on the fundamentals side.

All market and economic data as of December 14, 2023 and sourced from Bloomberg Finance L.P. and FactSet unless otherwise stated.

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Index Definitions:

The MSCI China Index captures large and mid-cap representation across China H shares, B shares, Red chips and P chips. With 144 constituents, the index covers about 85% of this China equity universe.

The CSI 300 is a capitalization-weighted stock market index designed to replicate the performance of the top 300 stocks traded on the Shanghai Stock Exchange and the Shenzhen Stock Exchange. It has two sub-indexes: the CSI 100 Index and the CSI 200 Index.