Down Angle Symbol A symbol in the form of an angle pointing downwards. China's economy is facing a real estate recession, a stock market downturn and deflation. Kevin Frayer/Getty
- The headwinds in China are well documented, but further turmoil could occur if policymakers do not act soon.
- IIF economists say Beijing will still be able to provide economic stimulus in 2024.
- However, a lack of policy support could lead to a “debt-deflation spiral.”
China's economy has emerged from the pandemic well below most analysts' expectations, and if policymakers do not intervene with sufficient support in 2024, a “debt deflation spiral” could ensue.
Current headwinds include deflation, an aging population, real estate turmoil and an overly pessimistic narrative surrounding Chinese stocks. While some economists and Wall Street strategists have told Business Insider they are skeptical about Beijing's chances of a recovery, researchers at the Institute of International Finance maintain a more optimistic outlook.
Gene Ma and Phoebe Feng said in an IIF report on Monday that they are sticking to a 5% growth forecast for China this year, above the consensus estimate of 4.6%, although this will depend on an appropriate policy response from officials in Beijing depends.
Deflation and falling stocks
The researchers said China's leadership has failed to specifically address lopsided supply and demand dynamics. Housing supply and productive capacity exceeded domestic demand, and key indicators of consumer prices and growth all showed negative readings in the fourth quarter of 2023.
“Deflation means that the PPI-adjusted real lending rate remained elevated in 2023 and credit conditions tightened despite the moderate easing of monetary policy,” Ma and Feng said.
Meanwhile, deflation has reduced corporate profits and stock prices in China, as well as wage growth and tax revenues. The CSI 300 index was one of the world's worst-performing equity benchmarks last year, while China's export price index fell 9% in 2023 due to sluggish export growth. Nominal GDP grew by 4.6% in 2023, 0.6 points below real growth.
Real interest rates are high amid deflation IIF
However, Beijing has the flexibility to stimulate demand through monetary and fiscal policy adjustments.
For example, banks could cut interest rates on new loans to boost borrowing, and the People's Bank of China could expand its loan financing programs, the IIF said.
The real estate recession
China's real estate market now accounts for a smaller share of the economy, and Beijing appears to have come to terms with the reality that it can no longer rely on property values to drive growth as it once did.
Since peaking in 2021, home sales and housing starts in China have fallen by 45% and 59%, respectively. However, the IIF expects policymakers to curb these declines this year, making the sector less of an economic drag.
“Year-on-year real estate growth in 2024, although still negative, will be less severe than the last two years and therefore will be comparatively less of a drag on growth,” Ma and Feng said. “Stabilizing living space and healing the Covid scars are likely to further boost private household consumption in 2024. The expansionary fiscal and monetary policy stance will help investments.”
Housing construction is in a deep recession Haver, IIF
The IIF maintains an optimistic growth forecast for China next year, but the team acknowledged that numerous risks remain, particularly given Beijing's recent policy mistakes.
“It may take longer than expected to recover from the severe housing crisis,” Ma and Feng said, adding that downturns in the real estate and stock markets could potentially hit household wealth and consumption more heavily in the coming months feared.
If policymakers fail to act, researchers warned that deflation expectations could strengthen, further weighing on domestic demand and foreign investment.
“Faced with dangers such as policy mistakes, deflation expectations and trade tensions,” the researchers said. “Without adequate policy support, the economy could enter a debt-deflationary spiral.”
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