China - How to safeguard growth while reshaping your growth model?

On 17 January, Q4 GDP numbers came in close to consensus expectations including ours. Annual growth accelerated to 5.2% yoy (Q3: 4.9%), driven by base effects from Q4-22, but quarterly growth slowed to 1.0% qoq s.a. (Q3: 1.5%). While the economy has recovered from the trough in Q2-23 (+0.6% qoq s.a.), there are still headwinds from the property sector and the slowdown in global demand. Full-year growth for 2023 came in at 5.2%, just above the 5% target. The focus now shifts to the annual NPC meetings in early March, when the 2024 growth target will be announced. Absent a similar reopening bonus like in 2023 and with Beijing trying to reshape China’s growth model, growth in 2024 will be more reliant on effective policy support. We expect ongoing piecemeal monetary easing and additional targeted fiscal support, but still no old-school ‘credit bazooka’, and have kept our growth forecasts for 2024 and 2025 unchanged at 4.7% and 4.6%, respectively.

Growth still dragged down by weakness in property sector and external demand

The December data were a mixed bag, showing that growth momentum is still fragile and the recovery from the dip in Q2-23 uneven. On the positive side, infrastructure investment accelerated on the back of policy stimulus, while retail sales and exports picked up in monthly terms. Caixin’s PMIs were also a bright spot, with the composite PMI jumping to 52.9 (Nov: 51.5). By contrast, the official manufacturing PMI and lending volumes disappointed, while property sector data remained lacklustre. Property sales and investment fell deeper into contraction territory, and house prices keep falling. For the first time since the GFC, headline inflation was negative for three consecutive months, although overall deflationary pressures seem to be ebbing a bit. The jobless rate rose marginally to 5.1%. All in all, Bloomberg’s monthly GDP estimate fell to 7.3% yoy (Nov: 7.6%). Going forward, we expect qoq growth to pick up a bit compared to Q4-23, helped by additional support (and lagged effects of past support). Bear in mind that, as usual, Q1 data will be distorted by Lunar New Year effects.

Growth will likely be more policy-dependent this year: more targeted support, still no credit bazooka expected

Absent a similar reopening rebound like in 2023, with headwinds from property and global growth weakness remaining, and with Beijing aiming for a different growth model, more support is needed to get a decent growth rate this year (of – say – 4.5% to 5%; specific target to be announced at the annual NPC in early March). In the Central Economic Work Conference held in December, Beijing announced a more effective and coherent policy framework for 2024. However, the efficacy of support is being hampered by a lack of consistency, with the recent tightening of video game rules reminding investors of the internet platform crackdown and with the PBoC recently defying (modest) rate cut expectations. Although the impact of previous stimulus is still partly feeding through (with for instance the PBoC injecting CNY 350bn into policy banks in December to help finance property), we expect further piecemeal monetary easing and targeted (fiscal) support. This is confirmed by plans to issue CNY 1 trn of ultra-long sovereign bonds and the announcement of a 50bp bank RRR cut. Allegedly, Beijing is also working on a CNY 2 trn fund to stabilise stock markets. Still, although the pendulum is shifting from ‘derisking’ to growth stabilisation again, we do not expect an old-fashioned credit bazooka, as that would run counter to Beijing’s longer-term goals of keeping overall leverage in check and reducing the economy’s dependence on real estate.