China’s economy has emerged from the pandemic well below the peak speed analysts expected, and if the authorities don’t interfere enough in 2024, a “debt-deflation spiral” could ensue.
The current headwinds are accompanied by deflation, an aging population, property turmoil, and incredibly bearish rhetoric around Chinese stocks. While some Wall Street economists and strategists have shared with Business Insider their skepticism about Beijing’s chances of sparking a recovery, researchers at the Institute of International Finance see a more positive outlook.
Gene Ma and Phoebe Feng said in an IIR report on Monday that they have a 5% expansion forecast for China this year, above the consensus estimate of 4. 6%, this depends on a good enough political reaction from of Beijing officials.
The researchers said China’s leaders have failed to cope with the unbalanced dynamics of supply and demand in particular. The housing source and production capacity exceeded domestic needs, and key customer value and signs of expansion turned negative in the fourth quarter of 2023.
“Deflation means that the genuine PPI-adjusted interest rate remained elevated in 2023, tightening the credit situation despite moderate financial easing,” Ma and Feng said.
At the same time, deflation has wiped out corporate profits and the value of inventories in China, as well as wage expansion and tax revenues. The CSI 300 index was one of the worst-performing inventory indices globally last year, while China’s export value index Nominal GDP grew 4. 6% in 2023, 0. 6 percentage points lower a genuine expansion.
However, Beijing has the flexibility to stimulate demand for adjustments in financial and fiscal policies.
Banks, for example, could simply cut rates on new loans to inspire more borrowing, and the People’s Bank of China could simply step up its loan financing programs, according to the IIR.
China’s asset market now accounts for a smaller percentage of the economy, and it turns out that Beijing has resigned itself to the truth that it can no longer rely on asset values to fuel its expansion as it once did.
Since peaking in 2021, home and home sales in China have plummeted by 45% and 59%, respectively. However, the IIR expects authorities to halt those declines this year, which would make the sector one less of a drag on the economy.
“The annual expansion of the real estate sector in 2024, even if it remains negative, will be less bad than in the following two years and therefore will restrain the expansion relatively less,” Ma and Feng said. “A stabilization of housing and a cure for the scars of Covid “They deserve to give an additional boost to family income in 2024. The expansionary fiscal and financial stance will boost investment. “
The IIR maintains positive expansion forecasts for China for next year, but the team acknowledges that many dangers remain, especially given Beijing’s recent policy blunders.
“The deep property crisis would possibly take longer than expected to recover,” Ma and Feng said, adding that slowdowns in real estate and inventory markets may also affect household wealth and consumption, potentially more severely than expected in the coming months.
Should policymakers fail to act, the researchers cautioned that deflation expectations could become entrenched, further weighing on domestic demand and foreign investment.
“Faced with perils, such as policy errors, deflation expectations, and trade tensions,” the researchers said. “The economy could fall into a debt-deflation spiral without adequate policy support.”
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