2024 Policy Easing in China

Overall, we see 4.2% GDP growth in 2024 and 4.0% in 2025, as the headwinds to growth remain in place.  Public sector investment and SOE activity will be reasonable, but is not enough with the structural headwinds for residential construction and exports and consumers not firing on all cylinders.  Additionally, China is making great progress on electric vehicle rollout; renewable energy transformation and expanding semi-conductor production.  This is all supportive of China’s growth, but are not enough to outweigh the headwinds for China growth.

 

The other side of this process is that production capacity exceeds domestic consumption trends, which causes disinflationary forces and also lower hiring needs/wage inflation.  Current core inflation reflects these dynamics.  Though the depressing effect from falling pork prices will likely ebb in 2024, headline inflation is likely to only rise to around 1% due to these disinflationary influences and well below the authorities desires for 3% inflation.  Thus nominal GDP will likely be around 5% in the next two years against official desires for 8% (5% GDP growth and 3% inflation).   

The shortfall in nominal GDP could argue for more aggressive stimulus.  However, China’s authorities are concerned that total non-financial sector debt/GDP could get too high and eventually cause a balance sheet recession like Japan in the 1990’s.  Additionally, a political bias remains towards supply side expenditure rather than cyclical or structural support for households (e.g. increased education/health/pension provision or later retirement age that could also sustainable boost consumption).  This means targeted approach to additional policy support will remain in place.  This will likely see further fiscal stimulus in 2024 and 2025 of a moderate rather aggressive nature.

Additionally, some further monetary easing will likely be evident.  We see a cumulative 30bps medium-term facility rate cuts slowly delivered over 2024, alongside two further 25bps reduction in the reserve requirement ratio (RRR).  We then see policymakers getting nervous about the growth shortfall and cutting the MTF rate by a further 25bps in 2025.  The Q3 PBOC report appears to heralding more emphasis on the price of money coming down and accepting that credit growth will slow to below 10% (as lending is targeted to growth sectors such as technology away from construction).  This is a potential policy mistake, as previous experience has shown that countries with excess debt need to sustain the quantity of credit growth and reducing the price of money is less effective.  However, the odds remain against China going to ultra-low interest rates and large scale QE via government bond purchases, both due to concerns that it could fuel the debt/GDP trajectory and also as they want to avoid a downward spiral for the Yuan (PBOC funding for policy banks lending should be regarded as credit easing rather than QE).  The problem of wanting to control multiple targets means that China authorities will likely restrain themselves, with the cost being a growth undershoot.