A stable property sector continues to be key to restoring both investor and consumer confidence in China’s economy development in 2024, Citigroup’s Greater China chief economist Xiangrong Yu said in an outlook briefing last week.
Second-hand home prices in 70 major Chinese cities have declined as of last November, the first time in nine years, while property sales dropped by 35% year-on-year compared to the peak period in 2021, Yu said. The spillover effect has led to contraction in sectors such as cemetery, glass, furniture and internal design.
Yu called for more timely and more forward-looking policies in 2024, as frequent stimulus measures in 2023 did not meet expectations.
“Previous policymaking has largely been reactive instead of proactive. A mismatch with market expectations in timing also exists. Timely and sufficient policies should be put in place to avoid further downturns,” he said.
A rebound in the property sector is not only significant for the industry itself, but also for a reestablishment in confidence.
“A stable property sector, a reduction in deflation risks and more policy certainty are needed before investor expectations are back,” he noted.
“A positive signal of bottoming out is much needed at this stage to prevent a continuing self-fulfilling prophecy of economic slowdown.”
The Citi team is predicting China’s 2024 budget deficit to reach either 3.8% of gross domestic product (GDP) or 3% plus Rmb1 trillion ($141 billion) of treasury bonds for long-term infrastructure. 3.8% would be the same deficit as in 2023. Financial stimulus is expected to contribute 1% of total GDP growth, Yu said.
Late last year in December, the People’s Bank of China’s (PBOC) reactivated its supplemental lending (PSL) programme, through which the central bank injects low-cost funds to three policy banks. Yu expects the total PSL issuance to exceed Rmb1 trillion.
The central bank did not reveal the exact usage of such funds, while they will likely be directed to help buffer the property sector, especially to affordable housing, urban redevelopment and public infrastructure construction.
Emerging sectors
Yu pointed out that the Chinese government has been seeking growth in other industries, with a possible aim to buffer a weakening property sector. Technological innovation, advanced manufacturing and modern infrastructure construction was cited by Yu as “three new growth engines”.
Statistics from China’s National Bureau of Statistics (NBS) indicated that a total amount of Rmb3.08 trillion ($420.9 billion) was allocated to research and development (R&D) in 2022, up 10.4% from the previous year. The Communist Party’s 14th Five-Year Plan suggested a targeted annual growth rate of 7% during 2021-2025.
He cited the domestic development of the semiconductor and chip-making industry as an example. Calculations from the team showed that the self-sufficiency rate of home-made chips had reached 33.6%, and17.3% in US dollar value as of the end of 2023.
“There exists great room in the market for domestic products in upcoming years,” he said.
On the manufacturing side, electric vehicles (EVs), lithium batteries and solar cells (or photovoltaics) have emerged as three major high value-added Chinese products, providing a considerable push to the country’s exports. Identified as the “new three”, they could act as key productivity boosters amid a structural shift in the manufacturing landscape.
The China Association of Automobile Manufacturers recorded a total of 995,000 EV exports in the first 10 months of 2023 with a 99.1% year-on-year growth, while total exports of lithium batteries reached $48.6 billion, according to the China Industrial Association of Power Sources.
Together with the more traditional tool of infrastructure construction, Yu predicts that the three industries could offer the economy a chance to outgrow its difficulties in the property sector. However, many challenges remain, especially with the structural shift not yet completed.
“A corresponding adjustment in supply chains, mismatch of skillsets in the labour market and external geopolitical tensions remain key problems to address. While in terms of demand, expanding the domestic market is crucial to avoid export challenges brought by protectionism,” he remarked.
Looking longer term, Yu said that the property sector, debt, an ageing population and technological advancement, pose structural challenges to China’s economy.
“There is a difficult balance to strike between short-term stimulus and structural reform.”
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