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China’s GDP growth slowed during the first three quarters of 2024, from 5.3 per cent to 4.7 per cent to 4.6 per cent, raising fears that the country would not achieve its annual growth target of around 5 per cent. But the latest data suggest that China’s economy is finally turning the corner.
Economic activity in China has been relatively weak since the COVID-19 crisis. This was not unexpected, at least not at first: three years of pandemic lockdowns strained household, corporate, and local government balance sheets. Declining business confidence – partly a response to a regulatory crackdown on finance, the property sector, and the platform economy – did not help matters.
In early 2021, when the United States emerged from the worst of its pandemic lockdowns, American households quickly began spending the money they had accumulated. Chinese households, by contrast, continued to accumulate savings even after the lockdowns were over: between January 2020 and August 2024, household bank deposits in China swelled by CN¥65.4 trillion (US$9 trillion), with the wealthy accounting for a significant share.
China’s government introduced some supportive policies over this period, but in contrast to past disruptions, it refrained from implementing aggressive stimulus policies, owing to concerns about possible side effects. The massive stimulus package the government introduced after the 2008 global financial crisis spurred growth, but it also fuelled a real estate bubble, drove up local government debt, and reduced investment efficiency.
The government’s calculations changed at the end of the third quarter of 2024, when it became clear that China’s economy would need more help to lift its growth trajectory. In late September, People’s Bank of China Governor Pan Gongsheng unveiled three measures: a reduction in banks’ reserve ratio, a policy rate cut, and the creation of monetary policy instruments to support the stock market.
Moreover, on October 12, Lan Fo’an, China’s finance minister, announced that new fiscal measures would focus on addressing local government debt problems, stabilising the real estate market, and supporting employment. He followed this announcement in early November with a CN¥10-trillion debt-swap plan for local governments.
Both Pan and Lan have suggested that more stimulus measures are in the pipeline, with Lan noting that China’s central government still has plenty of room to increase its debt and deficits. But recent data on high-frequency economic indicators – which tend to be the quickest to respond to macroeconomic policy changes – suggest that the government’s actions began taking effect almost immediately.
In October, total ‘social finance’ – total financing to the real economy – was up by 7.8 per cent year-on-year, and outstanding bank loans had increased by 7.7 per cent. Retail sales had risen by 4.8 per cent year-on-year, and by 1.6 percentage points from the previous month. The manufacturing purchasing managers’ index reached 50.1, after three months of sub-50 readings, and increased again, to 50.3, in November.
In more good news, the surveyed urban unemployment rate dropped by 0.1 percentage points in October, to 5 per cent. Even the property market improved marginally, though land sales and real estate investment remained weak. If these positive trends continue, GDP growth will probably return to around 5 per cent in the fourth quarter of 2024.
The outlook for 2025, however, is less clear. If China is to achieve 5.0 per cent GDP growth next year – assuming this is the government’s target – policymakers will have to overcome three key challenges, starting with stabilising the property sector, which contributes about 20 per cent of GDP growth and accounts for 70 per cent of household wealth.
The second challenge is local governments’ balance sheets. A shortage of funds has lately been driving local authorities to cut spending, such as by reducing officials’ salaries, and grasp for revenues, such as by chasing corporate back taxes and even detaining private entrepreneurs from other regions. None of this is good for growth.
The fundamental problem is that spending responsibilities now exceed fiscal revenues, which are no longer being bolstered by land sales and local government investment vehicles. The central government must urgently transfer a significant amount of general-purpose revenue to local authorities. More fundamentally, China needs to reconfigure the balance of fiscal responsibilities across levels of government.
The third major challenge that China will confront in 2025 is US President-elect Donald Trump, who has vowed to impose 60 per cent tariffs on all imports from China during his first year in office. Given that China’s exports to the US account for 3 per cent of its GDP, such tariffs – and even much lower ones – would have a material impact on growth in 2025. The investment bank UBS, for instance, predicted that China’s GDP growth would slow to 4 per cent in 2025.
There has been much debate in China over whether the economy needs structural reforms or more macroeconomic stimulus. The truth is that it needs both. A decisive stimulus package, with a robust fiscal policy component, must come first; this will make the biggest immediate difference. But once the package is in place, the government should turn its attention to structural reforms, with a focus on boosting confidence among consumers, investors, and entrepreneurs.
Over the past year, China’s government has published several policy documents aimed at restoring confidence. But with market participants not fully convinced, it must go further, implementing – boldly and visibly – some of the measures it has announced, such as stronger protections for private enterprises. Reining in local officials’ scrutiny of old tax records in search of missing payments would also go a long way towards strengthening business confidence.
Huang Yiping, Dean of the National School of Development and a professor at Peking University, is a member of the Monetary Policy Committee of the People’s Bank of China.© Project Syndicate 2024www.project-syndicate.org
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