OECD Economic Outlook, Volume 2024 Issue 1

China

Economic growth will ease to 4.9% in 2024 and 4.5% in 2025. Adjustment in the real estate sector continues with housing starts still falling. However, infrastructure and manufacturing investment are growing at a moderate, but steady, pace. Consumption growth will be stable but damped by high precautionary savings after the pandemic. Debt resolution of local government investment vehicles will gather momentum. Exports will pick up again as global demand recovers, and an increasing number of Chinese goods become competitive in international markets. Consumer price inflation will remain very low and producer prices will continue to fall.

Monetary policy has become more supportive through a series of interest rate and reserve requirement rate cuts, including a recent cut in the benchmark mortgage rate. Scrapping the mortgage rate floor in cities with weak recent house price performance and other measures will help with stabilisation of the property sector. Fiscal policy will become more supportive with the regular issuance of additional ultra-long central bonds for priority projects. An equipment upgrading programme will boost both business investment and household consumption. Creating more favourable conditions for the private sector and a new round of opening to foreign direct investment, including removing all entry barriers to manufacturing, should lift productivity growth.

Economic growth has firmed

Growth firmed towards the end of 2023 and reached 5.3% in the first quarter of 2024, following a moderate recovery earlier in 2023. The private sector has been suffering from both subdued exports and the ongoing real estate investment correction. Property investment is still declining, weighing on growth, but at a slower pace. Infrastructure investment has been growing at a steady but moderate rate due to financing constraints of local government investment vehicles, and manufacturing investment has been held back by soft export demand. Consumption growth is stable but is being constrained by renewed high precautionary savings. A weak recovery of tourism imports has limited import growth and boosted the current account surplus.

China: Economic growth and investment indicators

1.Year-to-date year-on-year growth.

Source: CEIC.

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China: Demand, output and prices

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CPI inflation was 0.1% year-on-year in March 2024 and has been negative at times during the past year, mostly due to food prices, in particular pork. In addition, productivity improvements, innovation and moving up the value chain are helping to keep prices low, alongside the gradual pace of recovery.

China: Interest rates and investment indicators

1.Year-to-date year-on-year growth.

Source: CEIC.

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Monetary and fiscal policy are becoming expansionary

Monetary policy continues to support the recovery and ensure adequate liquidity. The benchmark lending rate and the ratio of reserves to be kept at the central bank have been cut multiple times. The benchmark mortgage rate, which is one of the two components for the mortgage rate, has been cut and the new mortgage rate adjustment mechanism ensures that the other component of the mortgage rate, linked to local housing price developments, also acts to reduce the interest burden. Renegotiation of rates on outstanding loans at a time of very low interest rates is also helping to ease the interest burden and support consumption. Improving access to financing and other support measures for the private sector announced during the Two Sessions (the annual plenary meetings of the legislative body and its consultative group) will support private investment and employment.

Fiscal policy will become more expansionary than previously anticipated in 2024 and 2025 as the central government starts issuing ultra-long maturity bonds (worth 0.8% of GDP) to finance priority projects. Moreover, some of the special local bonds issued last year have not been used and will support projects this year, amounting to some 0.4% of GDP. With the rolling out of debt resolution plans for the most indebted local government investment vehicles, uncertainty will no longer weigh on the overall financing of investment projects. This solves the immediate issue of obtaining financing for projects, but the problem of implicit debt at the local government level needs to be addressed effectively and in a timely manner. Project financing will be better monitored, and funding will be allocated to approved projects only. The newly announced “cash-for-clunkers” programme, aiming at upgrading machinery, equipment and appliances, will support both consumption and investment.

Growth will continue to slow gradually

Following a moderate rebound, the Chinese economy will return to its gradually slowing path with potential growth falling due to unfavourable demographics and slower productivity growth. Ongoing adjustment in the real estate sector will continue to weigh on residential investment and on related items of consumption, such as furniture sales. Infrastructure investment will pick up, helped by expansionary fiscal policy, and a gradual resolution of the debt and financing issues of local government investment vehicles. There are high needs related to the green transition, urban village redevelopment and other environmental and social targets. Consumption growth is expected to remain stable and unlikely to pick up as long as the lack of social security reforms keeps precautionary savings high. Recovering foreign demand will lift exports, employment and private sector investment. Tourism imports, the largest single component of imports, may not recover to pre-COVID-19 levels. Further moves up the value chain in industry will increase the competitiveness of Chinese goods and reduce reliance on imported parts and components. The current account will remain in surplus.

Overall, risks to growth are tilted to the downside. Potential further credit events may disrupt the orderly adjustment process in the real estate sector. Excessive relaxation of demand‑side restrictions in the property sector would result in stronger growth, but also in a further build-up of imbalances and sharper adjustment down the road. Delays in addressing implicit local government debt may lead to continued accumulation of such debt and costlier resolution later. Postponing social security reforms may keep uncertainty high and entrench higher precautionary saving behaviour. Fiscal expansion coupled with more stringent measures to raise spending efficiency may lift the impact of the spending and result in higher growth.

There is ample room to lift the growth potential through structural reforms

While looser monetary and fiscal policy will support demand in the short run, a stronger social safety net is needed to rebalance the economy towards consumption and reduce savings. Unemployment insurance coverage should be extended to all, and pensions should provide at least a minimum standard of living to all eligible people. Furthermore, the list of treatments and medicines covered by health insurance should be widened so that health costs do not push people into poverty. A range of structural reforms would lift China’s growth potential. A renewed emphasis on creating a single domestic market should bring about a new round of phasing out administrative monopolies and dismantling local protectionist barriers. Improved market access for both private and foreign firms could potentially boost competition and hence also productivity and growth, but smaller firms need further regulatory support to be able to compete with dominant players. Removing entry barriers to foreign capital in manufacturing is a welcome step and should be extended to services.