Global News Insider

Written by: Marián Šeliga

As the Lunar New Year in China officially starts today (February 10), we would like to undertake a comprehensive summarization of China’s economic performance in 2023. Additionally, forecasting for the upcoming year is essential. This analysis gains heightened significance in light of the escalating scepticism towards China’s economy.

Contents:

1. China’s economy underperformed in 2023

2. Forecast for 2024

3. Systematic problem of China’s economy?

China’s economy underperformed in 2023

As the 2023 year has clearly shown up, there are very serious challenges China’s economy is facing today. Statistics reveal that China underperformed in just about every economic indicator in 2023. China’s economy has been especially hit by the following factors: high youth unemployment, underperforming stock market, crisis on property market and a general lack of confidence in the economy prospects. The complicated situation in the real estate sector has had an especially negative impact on the whole economy, as this sector was responsible for a huge part of GDP produced by China in previous years, mainly before the COVID pandemy. According to some statistics, the property and construction market created around 30% of China’s GDP.

China’s economic dynamics is also significantly influenced by salient external factors, including the constrained international geopolitical landscape characterized by the Russia-Ukraine conflict, crises in the Middle East, and the persistent strain in U.S.-China relations, manifesting in restrictions on exports to China. Furthermore, the tight relations between the European Union and China and ever increasing calls for decoupling or derisking from China undoubtedly contribute to the challenges China’s economy faces today.

Against the backdrop of the ever decreasing trust between EU and China, China’s prime minister Li Qiang visited Switzerland and Ireland in the middle January and delivered his public speech in Davos during the World Economic Forum. Switzerland and Ireland were provided with a special visa free regime to China aimed at boosting economic cooperation and mutual investment. Previously China has also given other European Union Members an simplified visa status to make it more comfortable especially for businessmen to visit China.

This serves as a clear indication that the Chinese government is actively seeking investment from the European Union (EU) for China’s economy. This initiative comes in response to an unprecedented outflow of Foreign Direct Investment (FDI), particularly in the years 2022 and 2023.

According to statistics, actual utilized new foreign direct investment for 2023 was 1.1 trillion yuan ($155 billion), which is 8% lower than in 2022.

In addition to the decline in Foreign Direct Investment (FDI), there’s a notably adverse trend in China’s stock market. The year 2023 proved particularly challenging for both domestic and foreign investors with holdings in Chinese stocks. Mainland China’s CSI 300 index experienced a significant 11.4% slide, marking its third consecutive year of decline. Meanwhile, Hong Kong’s Hang Seng index recorded a nearly 14% fall in 2023, making it the worst performing major Asian stock market.

So we see a solid basis of arguments showing that China’s economy is not in a good shape and as of now, there isn’t a reliable indicator signalling imminent improvement for investors. In the subsequent sections of the article, we will delve deeper to determine whether the intricate issues in China’s economy exhibit characteristics of a systematic problem or if they might be attributed to mere coincidence.

Forecast for 2024

The International Monetary Fund (IMF) expects China’s GDP to grow by 4.6% in 2024. Addressing World Economic Forum in Davos China’s prime minister Li Qiang said that China’s economy grew by 5.2% in 2023 and he expected that it will grow by around 5% in 2024.

In order to improve the flailing economy, President Xi Jinping’s administration has introduced a set of new initiatives in 2024, including measures to attract foreign investors and stimulate domestic consumption. 

China plans to cut the reserve requirement ratio for banks by about 50 basis points in February. This is one of the stimulus for the investors and economic subjects to take loans at lower prices. As a result of this measure, it is estimated that roughly $141 billion will flow into the economy. This measure should stabilize the market and restore confidence of investors into the market.

On January 23 the information revealed that the Chinese government is aiming to get about 2 trillion yuan ($278 billion), primarily through offshore accounts of Chinese state-owned companies to resuscitate the Chinese stock market by purchasing stocks onshore through Hong Kong markets. This has had a positive signal for growth among China’s stocks like BYD, Li Auto, Baidu, NIO, Alibaba in the short run, but we are not sure about the long lasting trend.

According to Bloomberg, Chinese policymakers have also put aside 300 billion yuan of local funds that would be used to invest into onshore shares through state-owned financial firms China Securities Finance Corp. or Central Huijin Investment Ltd.

While the Chinese government has already taken some monetary measures, it appears that these policies have inherent limitations. Of greater significance is the restoration of confidence among private investors in the market and the potential for increased earnings. Certain equities exhibit a consistent downward trend over an extended three-year period. There is also a call for less restrictive policy towards the technological sector and private companies overally.

Systemic problem of China’s economy?

While the overall outlook for China’s economy is bleak, there are several considerations that potential investors in China or Chinese equities should take into account, especially in the long run. Firstly, China’s economy continues to grow, albeit potentially at a rate lower than officially indicated. At the same time, there is a significant level of domestic savings that could be leveraged to support the economy, but again without a comprehensive enhancement in employment rates, growing domestic consumption and Foreign Direct Investment (FDI) as well as without properly addressing mounting debt especially at local level, there is scant evidence to suggest a substantial improvement in the economic landscape for the year 2024.

Certain economic sectors are exhibiting growth despite the challenging economic conditions. Notably, the electric vehicle (EV) industry, with companies such as BYD and Nio, stands out for its innovation and productivity, making them leaders in global EV sales and advancements in autonomous driving.

As per the analysis of certain experts, China is currently grappling with the challenges associated with the middle-income trap theory, accompanied by systemic issues characterized by lingering deflationary trends, an ageing population, as well as increasing unemployment rate among young overqualified people. The predominant concerns revolve around elevated local debts and the real estate sector, notably marked by a substantial number of incomplete or unsold properties, posing significant economic challenges.

It’s important to note that the fall of Evergrande has not mirrored the magnitude of Lehman Brothers’ impact on China, although the problem is serious. While the enduring challenges pose significant concerns for domestic and international bondholders, contractors, and individuals who have suffered financial losses, the paramount issue, particularly in the context of the broader economy, lies in the potential risk associated with the exposure of lenders and the capacite of the latter to absorb the losses.

According to the latest information, the largest 4 state banks (Big G4) starting from 26.1.2024 have initiated the process of issuing non-capital debt instruments (in total 260 billion yuan) to remedy the gap in TLAC (Total Loss absorbing capacity) which is around 2 trillion yuan.

Another large real estate developer Country Garden is ramping up its domestic and overseas assets to raise cash for bond coupon payments. There are massive discounts all over China provided by Country Garden to people who might buy the property. This is a typical deflationary example, when a huge developer is squeezing the price down in order to survive. Foreign traders are still waiting for signals of economic rebound before they can return to China. Domestic investors and ordinary people prefer to hold their savings and wait as well.