The economy of China grew stronger than expected at the start of 2024, largely due to robust growth in high-tech manufacturing. Kavan Choksi Japan points out that the GDP of the country, thereby beats the estimate of 4.6% growth from a prominent poll of economists. It also marked an acceleration from the 5.2% growth in the previous three months. However, while the Chinese economy did get to a good start in the first quarter, the foundation for economic stability and improvement is not yet solid in the country.
Kavan Choksi Japan talks about the shifting growth drivers of China
Consumption was the main growth driver for China’s economy in 2023, but has weakened in 2024. The void left by it has been filled by a recovery in manufacturing amid the continued strong performance of electric vehicles and a push for technology self-sufficiency. Industrial production is up 6.2% year-on-year and manufacturing fixed asset investment is up 9.6% YoY YTD.
For policymakers in China, stabilization has been the primary goal for 2024. This has led to a slew of supportive policy measures. People’s Bank of China eased policy in February, followed by the Two Sessions in March, which took a supportive tone. Moreover, an acceleration of policy rollout started late April, with several moves made for the purpose of shoring up the property market.
At the moment, weak confidence is among the prime headwinds to the economy, and has been dragging down both consumption and investment. Fears of a local government or property market debt crisis, however, have somewhat calmed down amid policy support. Subsequent to a pretty active second quarter, it has been not too clear whether policymakers shall be content to sit back and observe the impact of their policies. There is a good chance that they would stay active, as the recovery is fragile. Manufacturing growth may additionally moderate amid tariff action.
As Kavan Choksi Japan says, the People’s Bank of China may further ease policy in the second half of 2024, with cuts to both the Reserve Requirement Ratio and interest rates. Owing to the goal of maintaining currency stability, the odds are that the PBoC has been resisting rate cuts to avoid adding to depreciation pressure on the renminbi and has preferred the utilization of RRR as a policy tool. Even with the earlier 50bp RRR cut, credit data has remained very weak year to date, and real interest rates remain too high. Fiscal stimulus may increase in the second half of the year once the funds from the RMB 1 trillion ultra-long-term bonds are utilized. This will become more pressing if the manufacturing and export sectors are negatively impacted by upcoming tariff measures. These initiatives are anticipated to help China achieve its target of approximately 5% GDP growth in 2024.
One of the major steps for restoring confidence in the economy would be the stabilization of asset prices, beginning with property. The property represents a huge proportion of household wealth. Hence, stemming the decline, in many ways, is the first move toward halting the negative wealth effect on the economy and steering clear of a deflationary mindset.