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SINGAPORE, July 9, 2024 – China’s economic recovery has continued to gain traction aided by a rebound in external demand and diminishing drag from its real estate sector correction. GDP growth is projected at 5.3 percent in 2024 and 4.9 percent in 2025. The authorities have embarked on a major restructuring of the economy through mobilizing “new quality productive forces” in the economy to enhance the quality of growth and transition to a technologically advanced economy. This is according to the preliminary assessment by the ASEAN+3 Macroeconomic Research Office (AMRO) after its Annual Consultation Visit (ACV) to China from June 4 to 18, 2024.

The AMRO team was led by Lead Economist Jae Young Lee, while AMRO Director Kouqing Li and Chief Economist Hoe Ee Khor participated in key policy meetings. The discussions centered on the drivers of the recovery and short-term risks; the effects of geoeconomic fragmentation on global supply chains and trade patterns; the correction in the real estate sector; strains in local government finances and long-term fiscal management; and key structural challenges.

Economic developments and outlook

“China’s growth is expected to come in at 5.3 percent in 2024. Consumption remains the primary growth driver, supported by greater traction in investment and a rebound in external demand,” said Dr. Lee. “Due to a robust supply-side recovery, inflation was subdued at 0.2 percent in 2023, and 0.12 percent in January-May 2024 but is expected to rise to an average of 0.8 percent for the whole year.”

Despite strong external headwinds and a downturn in the real estate sector, China’s economy was resilient and grew by 5.2 percent in 2023. Helped by a rebound in external demand and supportive fiscal and monetary policies, the economy is expected to gain momentum for further recovery in 2024 before moderating to a trend rate of 4.9 percent in 2025.

The country’s macroeconomic fundamentals remain sound. Both consumption and investment, especially in high-tech manufacturing and high-tech services, are expected to pick up further. The real estate sector is undergoing a major correction and is expected to bottom out in the first half of 2025 as policy measures take greater effect and sentiment improves. Trade recovery is well underway, led by an upturn in electronics cycle, bringing positive spillovers to domestic economic activities.

Risks and vulnerabilities

The balance of risks is slightly tilted to the downside, with uncertainties in the external sector and challenges domestically.

External risks include an unexpected tightening in U.S. monetary policy due to persistent high inflation, as well as escalating geopolitical tensions or adverse geopolitical events. These risks could drag global growth down, heighten protectionist measures, or cause more damaging geoeconomic fragmentation.

Major domestic risks include potential setbacks in the recovery of the real estate sector, persistent financial strains on some local governments, and a deterioration in asset quality of some rural commercial banks.

Longer-term challenges would stem from climate change, de-globalization, and population aging.

Upside risks include external demand exceeding expectations, a more rapid recovery of the real estate sector, and positive spillovers to domestic consumption and investment.

Policy recommendations

To realize its economic growth potential, China must intensify its structural reforms to contain and defuse near-term risks and address long-term challenges. Tackling structural and longer-term challenges demands forward-looking policies.

Fiscal policy should continue to support the economic recovery, help create more jobs in the near term and support economic restructuring in the longer term. However, the larger fiscal deficits over the last few years have led to a notable increase in the debt/GDP ratio, hence China should implement fiscal consolidation over the medium term to rebuild its fiscal space. Sustained fiscal consolidation could include phasing out tax relief measures when appropriate, introducing revenue-enhancing measures, and tightening investments of local government financing vehicles (LGFVs).

Mitigating heightened fiscal strains that weaker local governments face requires a multipronged strategy, involving coordinated efforts and long-term commitments. There is a need to continue improving the allocation of fiscal responsibilities, revenue-sharing, and spending between the central and local governments.

Reducing and capping the stock of LGFV debt is a top priority to prevent systemic spillovers to the financial sector. Although strict supervision and oversight of LGFVs are in place, a comprehensive market-based strategy is necessary to facilitate debt restructuring and mitigate debt-related risks.

In this regard, the Chinese authorities have taken a proactive approach which has had significant positive effects. Measures taken over the past year include those which enable local governments to secure refinancing and help the ones facing greater strains to defuse risks related to hidden debt, imminent debt maturities, and debt-servicing burdens. Overall, risks related to local government and LGFV debt are under control.

Monetary and credit policies have been accommodative, and there is room to provide more targeted support to sectors which are still lagging behind in the recovery such as real estate. While the financial sector is sound as a whole, there are pockets of weakness among some regional banks which should be addressed. In particular, some of the rural commercial banks need to strengthen their balance sheets.

Real estate policies should facilitate the sector’s near-term recovery by supporting overstretched yet viable developers, improving market sentiment, and mitigating oversupply. Decisive reforms are essential for the sector’s long-term development, including the proper use of funds, prevention of over-expansion, and strengthening of the pre-sale framework of housing units to minimize the risk to buyers of being stranded.

The Chinese authorities are confident of achieving high-quality economic growth by intensifying structural reforms and leveraging technological innovations to boost productivity and efficiency. China should also take measures to upgrade its labor force to meet the needs of the new economy, improve the working conditions of migrant workers, and strengthen the social security system to meet the needs of the aging population. These measures will also help boost domestic consumption and its role as a driver of growth.

Amid geoeconomic fragmentation, China should remain committed to adhering to the multilateral rules-based trading system and step up efforts to enhance economic linkages and promote cooperation worldwide, with the ASEAN+3 region as a key partner. The reprioritization of the Belt and Road Initiative to focus on renewable energy and sustainable growth projects is welcomed as it will contribute to the global climate change agenda. The shift will also encourage the renewable energy companies in China to invest in BRI countries and add to global growth.

AMRO would like to thank the Chinese authorities and other participating organizations for their strong support, excellent arrangements, and candid sharing of views and ideas.

About AMRO

The ASEAN+3 Macroeconomic Research Office (AMRO) is an international organization established to contribute toward securing macroeconomic and financial resilience and stability of the ASEAN+3 region, comprising 10 members of the Association of Southeast Asian Nations (ASEAN) and China; Hong Kong, China; Japan; and Korea. AMRO’s mandate is to conduct macroeconomic surveillance, support regional financial arrangements, and provide technical assistance to the members. In addition, AMRO also serves as a regional knowledge hub and provides support to ASEAN+3 financial cooperation.