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China’s Economic Challenges in 2023

(Bloomberg) — China is set to publish the last major data dump for 2023, capping a difficult year after its emergence from Covid Zero and shifting the attention to whether it can sustain momentum this year.

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The figures for gross domestic product, industrial production, and retail sales are likely to show improvements from the same period in 2022, helped by a low base of comparison when pandemic restrictions hampered economic activity.

GDP likely increased 5.2% over all of last year, according to economists surveyed by Bloomberg, in line with the governmentÔÇÖs target of around 5%.

Beijing is widely expected to set this yearÔÇÖs growth target at around 5% again, though that would be much more ambitious given the higher base. Without more aggressive stimulus, economists are expecting growth to slow to 4.5%, according to a Bloomberg survey.

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HereÔÇÖs what else to expect when the statistics bureau publishes data on Wednesday:

Data Insights

The start of 2024 brought negative news for the economy, as recent data featured continued declines in consumer prices, flat import growth, and a slowdown in the pace of lending ÔÇö all suggesting sluggish domestic demand will again top the nationÔÇÖs economic challenges in 2024.

In the final quarter of 2023, the consensus forecast is for GDP growth to accelerate to 5.3%. The Bloomberg Economics nowcast model estimates the rate could be a tad higher at 5.4%, although the margin of error one day ahead of the NBS release is around 0.4 percentage point, economists Andrej Sokol and David Qu wrote in a Tuesday note.

Industrial and Retail Data

• Industrial production is expected to climb 6.6% in December from a year earlier, compared with NovemberÔÇÖs 6.6% growth.

• Retail sales likely expanded 8% in December from 10.1% the previous month.

• Fixed-asset investment for the full year is poised to expand 2.9%, unchanged from January-November and the slowest annual growth in three years.

• Property investment is likely to shrink 9.5% over the whole year from a 9.4% drop in the first 11 months.

2024 Economic Outlook

Real estate, which once accounted for a fifth of the Chinese economy along with related industries, remains the biggest threat to growth outlook in 2024.

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ÔÇ£If the property market cannot be stabilized and if its plunge deteriorates, the correction in housing prices could worsen, dealing a further blow to household confidence,ÔÇØ Wang Tao, head of Asian economic research at UBS Group AG, said at an event last week.

She said itÔÇÖs not clear when new housing starts, a gauge of developer confidence, will rebound. Housing supply will remain abundant as previously unfinished projects are completed and more multiple-property owners may want to sell, squeezing householdsÔÇÖ demand for new homes, she added.

Infrastructure spending, backed by the government, will need to pick up to counter the real estate drag. Citigroup Inc. economists expect infrastructure investment growth to accelerate to around 8.5% this year from an estimated 5.8% in 2023.

Consumption may only mildly recover, given the lack of strong government incentives like direct subsidies to households, job market uncertainty, and falling home prices. Deflationary pressures will likely persist due to weak confidence, even if thereÔÇÖs a potential rebound in pork and energy prices.

Exports could stabilize in 2024 after posting the first annual decline since 2016 last year. This will be supported by recovering global demand for semiconductors, but trade tensions will likely intensify with major partners over products like electric vehicles.

Policy Support

Policymakers need to take ÔÇ£decisiveÔÇØ actions to turn around the property sector, Macquarie Group economists including Larry Hu wrote in a note in early January. One option would be to create a ÔÇ£lender/buyer of last resortÔÇØ to bail out developers, similar to what the US did during the Global Financial Crisis, they said.

Yao Wei, Societe Generale SAÔÇÖs chief economist for Asia Pacific, predicts the PeopleÔÇÖs Bank of China will offer an additional 650 billion yuan ($91 billion) of low-cost funds under its Pledged Supplemental Lending program to finance public housing projects this year.

Economists are calling for stronger fiscal policy to bolster growth. Authorities have stepped up fiscal stimulus by leveraging up the central government, giving debt-laden local authorities some respite. ThatÔÇÖs a strategy economists expect will continue into 2024 as the government seeks to rebuild confidence.

The PBOC is also likely to keep liquidity ample to help banks buy government bonds. A senior official has hinted the central bank may cut the amount of cash banks must keep in reserve, known as the reserve requirement ratio or RRR.

The PBOC maintained the rate on its one-year policy loans on Monday, disappointing investors expecting the first trim since August. However, there might be more room to lower rates if the US Federal Reserve starts cutting rates this year as that would ease depreciation pressure on the yuan.

The rate hold means ÔÇ£the chance of an RRR cut in February is higher,ÔÇØ Xing Zhaopeng, senior China strategist at the Australia & New Zealand Banking Group Ltd.

(Updates with final survey results, Bloomberg Economics estimate for fourth-quarter growth.)

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