China: 5% for 2024 but Still Imbalanced into 2025
Though China hit the 2024 GDP growth target of 5.0%, monthly data shows the economy unbalanced. Industrial production/exports and state investment support the economy, with residential property investment negative and consumption sluggish. With monetary policy ineffective, we see Yuan3-5trn fiscal policy stimulus arriving from the March NPC and stick with our 4.5% GDP forecast until we see specific details of the package.
Figure 1: Retail Sales Yr/Yr (%)
Source: Datastream
China’s economy remains unbalanced, despite hitting 5.0% GDP growth in 2024 – Yr/Yr at 5.4% in Q4. The December data shows a better than expected industrial production at 6.2% Yr/Yr with a 0.6% jump on the month. High tech manufacturing led the way and is consistent with the strong export picture seen recently. However, December retail sales was only marginally better than expected at 3.7%, with a mere 0.1% rise on the month. The breakdown also shows underlying weakness, with the post COVID boom in restaurants now finished with a slow 2.7% Yr/Yr. Headline retail sales was boosted by the trade in for household appliances, which was 39% Yr/Yr.
Investment also remains imbalanced with residential property investment at -10.6% YTD Yr/Yr. Fixed investment was a slow 3.2% Yr/Yr, with the private sector seeing 0.1% Yr/Yr decline. The latter sluggish private company investment also bodes badly for new jobs, given that the private sector traditionally generates the most employment change.
2025 will likely be harder, as we outlined in the December Outlook (here). Net exports positive contribution will likely become more neutral, as we see the Trump administration threat of tariffs turning into reality at 30% average by mid-year. This will hurt export growth directly to the U.S., especially as exports have recently been front loaded to avoid extra tariffs. With residential investment still likely to be a drag on GDP, plus sluggish consumption, only production and central/local/SOE investment is driving the economy.
We see a 50bps RRR cut in February after China lunar new year. Additionally, we see a 20bps cut in the 7-day reverse repo rate in March after the NPC meeting. However, with debtor’s appearing interest rate insensitive, we worry that monetary policy is not effective. The key is fiscal policy and we still see a Yuan3-5trn package arriving from March NPC onwards. However, the authorities are not in a rush like 2009 or 2015, as China remains restrained by the large outstanding debt across all sectors. Thus we stick with the 4.5% GDP growth forecast for 2025.