- What does China New Model look like in 2024 and beyond?
- What is the China macro-outlook in 2024?
- Is liquidity abundant or lacking in China?
China New Model and 2024 Macro Outlook
In summary, on China’s New Model, we think transition of China’s new funding of growth from debt led to tax, equity and bond led growth, transition of new pillar of growth from consumption to demand led growth, transition of new focus of structural reform from supply side reform to demand side reform, may fit more for China’s current and next stage of development. It is crucial and imperative in determining both the quality and quantity of China’s growth in the decades to come.
On 2024 China macro-outlook, we think, China indeed achieved soft landing after three years of deleveraging in the property sector; however, given its long aftermath effects, this fundamentally positions China for a soft rebounding in 2024, and it is a bit too early to say normalization rather possibly softer rebounding in 2024 than in 2023; Risks remain in 2024 on unfinished homes, local government debts and geopolitical risks, but we classify them as soft risks, i.e. softer in 2024 than in 2023.
On liquidity situation in China, the utmost important factor determining the magnitude and degree of current economic recovery hence market performance, is worth our deep dive. Liquidity is abundant in the sense of the overall stock value, but it is lacking in the sense of both flow and growth.
What does China New Model look like in 2024 and beyond?
We believe the new funding, pillar, and focus of structural reforms are fundamental in determining the quality and quantity of growth for China in the current and next stage of development. These three aspects stay at the core of the China New Model.
- What is the new funding?
In our view, funding of growth is the core in the China New Model, determining both the quantity and quality of growth in the next stage of development. Chinese growth in the past four decades has been significantly debt led. In 2022, debt financing as a percentage of GDP accounts for 343.9% of GDP, vs. bond, tax and equity financing in total at 98% of GDP (separately bond 75.4%, tax 13.8%, and equity 8.8%). 
This is why debt deleveraging has been a constant task for the Chinese policy makers. Shadow banking is peaking at CNY28trn in 2017 and declining to around CNY19trn in 2023. It is apparent transition of China’s funding of growth from debt led to tax, equity and bond led growth takes slower than expected. Even though it will take more time to realize, but it is both crucial and imperative from diversification and quality of growth perspectives.
- What is the new pillar?
Along with the funding of growth, transition of pillar of growth for China from export led growth to consumption led growth is still halfway through. Consumption as a percentage of GDP in China troughs in 2010 at 49.3% and picks up to 53.2% in 2022, which shows flattening and declining trend since 2017. It is lower than South Korea 67.1%, Japan 77.2%, Brazil 81.1%, and the US 82.3%. We think pillar of growth should transition from consumption-led growth to demand-led growth, which may fit China more at this current stage of development.
- What is the new focus of structural reform?
Besides the funding and pillar of growth, as for the focus of structural reform, it is time to transition from supply side reform to demand side reform. In our view, supply side reform and demand side reform are equally important for China’s next stage of development. China has succeeded in supply side reform of de-capacity, such as steel production growth decelerates to -0.5% growth in 2022 from the peak at 30.3% in 2005. China crude steel production as a percentage of world steel production flattens at around 55%.
The key to transition from supply-side reform (de-capacity) to demand-side reform (generating more demand) lies fundamentally in household disposable income. The three mountains facing Chinese households include property, healthcare and education. The 10 year long term trend growth of urban disposable income stands at 7.2% in 2022, slower than the growth of housing at 8.1%, healthcare at 8.5% respectively. Elevated property price is the main drag of consumption, with its ratio against disposable income stood at 6.5x. Despite average mortgage rate fell from 5.63% in Dec-21 to 4.02% in Sep-23, the mortgage payment still accounted for 33% of the household disposable income. To promote household disposable income growth is becoming imminent and imperative for the Chinese policy makers.
On China’s New Model, we think transition of China’s new funding of growth from debt led to tax, equity and bond led growth, transition of new pillar of growth from consumption to demand led growth, transition of new focus of structural reform from supply side reform to demand side reform, may fit more for China’s current and next stage of development. It is crucial and imperative in determining both the quality and quantity of China’s growth in the decades to come.
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Nathan Chow 周洪禮
Senior Economist and Strategist - China & Hong Kong 高級經濟學家及策略師 - 中國及香港
[email protected]
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