China: 5% 2024 Goal Tough with L Shaped Residential Property
Bottom Line: China’s 5% growth target will likely be tough to meet with residential property investment likely to knock 1.0-1.5% off GDP and net exports a small negative. With sluggish private investment, this means the old engines of growth are not firing. Some additionally fiscal stimulus will likely be seen on top of today Yuan1trn announcement, but we feel that this will not be enough – we have marginally increased our 2024 real GDP forecast to 4.4% from 4.2%.
Figure 1: Estimate Average Annual Housing Demand
Source: IMF Article IV 2024, selected issues (here)
China has set a 5% goal for real GDP growth as widely expected (here). To help Premier Li Quang also announced a Yuan1trn extra-long dated special sovereign bond issue, beyond the official 3% target for the central government deficit. This will be used for major projects and national security issues, which will boost public investment.
While this new fiscal spending will help, it will be insufficient to really hit 5% growth. Firstly, the fallout from the sharp decline in residential construction will still be negative on the economy, with home sales weak over the lunar New Year period. Household sentiment towards buying residential property has been severely hit by the crisis among developers, while developers also have a large excess inventory – especially in tier 3 cities. Fundamental demand for new house is also on a multi-year downtrend, both due to population aging and a slowing pace of urbanization (Figure 1). Secondly, net exports are also likely to be a small drag on GDP, both due to slower global growth in 2024 and some supply chains shifting away from China (here). Since China authorities are reluctant to see too much Yuan weakness this is unlikely to change. Finally, private investment is only showing weak growth, as the government crackdown on various sectors has sapped business optimism.
Further policy measures are likely over 2024, including 30bps of cuts in the 1yr medium-term facility rate and a further 50bps cut in the reserve requirement ratio. However, this will be insufficient, given weak household demand for loans (close to zero). This means fiscal policy needs to do the heavy lifting in 2024. However, China authorities know that the 3% fiscal target for central government does not reflect China overall fiscal stance. The IMF have an alternative general government deficit/GDP measures, which including local authorities financing vehicles and other off balance sheet central government funds. This is projected at 13.3% of GDP in 2024, which is excessive. While China authorities will not acknowledge this alternative IMF measure, recent official comments to the IMF suggest caution of additional fiscal stimulation in Beijing (here). This all means that real GDP will likely fall short of the 5% target, though the actual numbers could end up being 5% given measurement errors and government pressure to hit the number. However, we now forecast a mere 0.3% for CPI inflation in 2024, which means that nominal GDP will be around a mere 5.5% of GDP – not enough to stop debt/GDP rising still further.