As the head of China’s biggest jewellery retailer, Kent Wong has his finger on the pulse of consumers in the world’s second-largest economy — and they are wary.
Wong, managing director of Chow Tai Fook, said the chain’s customers have been pivoting from diamonds and other gemstones to gold, a store of wealth in tough times. “In the short term, people will continue to be more cautious no matter [whether it’s] consumption or investment,” he said, adding though that he expected consumer confidence to return in a year or two.
Wong’s subdued outlook for 2024, shared by many analysts, comes as policymakers in Beijing brace for a decisive year in their battle to restore the economy’s animal spirits and escape the threat of a debt-deflation spiral.
The government is expected to reveal on Wednesday that gross domestic product grew about 5.2 per cent last year, according to a Reuters poll of analysts. While that would slightly exceed the official target of 5 per cent, economists said 2024 was expected to be more challenging, with the same poll predicting growth will slow to 4.6 per cent.
A property downturn is well into its third year, exports are weak, wary investors are steering clear of China’s financial markets and policymakers are fighting what Morgan Stanley analysts say is the country’s longest run of deflationary pressure since the 1997-98 Asian financial crisis.
“I think it’s a critical year for the Chinese economy in the sense that deflation could be entering a vicious cycle,” said Robin Xing, chief China economist at Morgan Stanley.
Xing said companies had started cutting debt and refraining from capital expenditure and hiring, while the job market was tough and salary expectations were deteriorating. “To break that cycle, we need to have some very meaningful policy efforts,” he said.
Analysts expect the annual meeting of the National People’s Congress, the rubber-stamp parliament, to again set an economic growth target of about 5 per cent when it meets in early March.
While robust compared with developed economies, last year’s target was China’s lowest in decades. After harsh lockdowns battered the economy in 2022, it should have been easy to achieve, analysts said, but the government was forced to step up fiscal support after growth wavered in the middle of the year.
The base effect of comparison with 2022 probably flattered China’s GDP growth last year by about 2 percentage points, said Hui Shan, chief China economist at Goldman Sachs.
As with last year, the property sector is the biggest uncertainty facing the economy in 2024, analysts said. The government has announced multiple initiatives, recently revealing that the central bank in December channelled Rmb350bn ($49bn) into banks through a facility known as “pledged supplementary lending”.
It did not explain what the loans were for, but analysts expect they might be earmarked for the “Three Major Projects” — a stimulus programme to help the housing construction industry.
Chris Beddor, deputy director of China research at Gavekal, said this scheme could be enough to put a floor under moribund construction activity, but property sales would be a bigger unknown. In December, China’s property sales were still only 60 per cent of pre-pandemic 2019 levels in 30 major cities.
Beddor said if the property crisis deepened further, authorities might be forced to launch a “bazooka” stimulus package that would surprise the market on the upside. But he added that his base case was for stabilisation rather than a rebound. “There will be some pretty modest pick-up this year, in other words at least things just stop getting worse,” he said.
Beyond the property sector, economists argued that a much broader stimulus package coupled with reforms was urgently needed to reflate the economy.
“Deflation is tremendously worrisome for a country like China that is accumulating public debt faster than Japan ever did,” said Alicia García-Herrero, chief economist for the Asia-Pacific at Natixis. During times of deflation, prices and wages fall, but the value of debt does not, raising the burden of repayments.
The central government needs to provide a fiscal package that targets consumption rather than more investment in manufacturing, said Morgan Stanley’s Xing. This could benefit China’s hundreds of millions of migrant workers, for instance, by offering them more access to social benefits, reducing their incentive to hoard savings rather than spend.
“We need a decisive shift to fiscal easing,” Xing said. “Of course the size matters and the speed matters. If policy continues to undershoot, eventually the policy ask to break this debt-deflation trap could be even bigger.”
Economists argued that exports, which shrank in dollar terms last year, could not be relied on to rescue the economy, given soft global demand. China’s stimulus policies, which prioritise expansion of state bank lending to manufacturers, have resulted in overcapacity and increasing friction with trading partners such as the EU.
Despite market calls for Beijing to ease policy and China’s own efforts to present an investor-friendly face, analysts said policymakers continued to send mixed signals.
The People’s Bank of China left an important lending rate on hold on Monday despite market expectations of a cut. Last month, the government shocked investors by announcing tough draft restrictions on video games after previously offering reassurances that a tech crackdown had ended.
The government tried to calm concerns by firing the official responsible for the draft rules, but analysts said the damage was done.
All of this would make hitting a GDP growth target of 5 per cent this year ambitious, economists said. Shan at Goldman said the government would need to reduce the drag from the property sector, implement more expansive fiscal measures, and “get lucky on exports”.
“If the government really wants to, one way or another it will figure out a way to get to 5 per cent. But it’s going to be a difficult task,” Shan said.