China’s economy has experienced twists and turns in 2023，but meeting the annual growth target of about 5.0% seems manageable. Looking forward to 2024，it is expected that economic growth will gradually converge to the potential level as economic and social functioning tends to be normal and policy remains steady and accommodating. The expected growth for the entire year is about 4.8%.

Review of China’s Economic Performance in 2023

In 2023，the government has set an annual GDP growth target of around 5.0%. In the first three quarters，the cumulative growth rate was 5.2%. According to the National Bureau of Statistics，the target for annual economic growth is feasible if the growth in the fourth quarter surpasses 4.4%，indicating that meeting this mark will not be overly challenging. However，when considering individual quarters，it is fair to say that the economic operation has exhibited some volatility.

After a smooth transition in pandemic prevention and control at the beginning of 2023，GDP grew by 4.5% year-on-year in the first quarter，up from 2.9% in the fourth quarter of last year，and exceeded market expectations and achieved a good start. Driving forces included a marked rebound in services and consumption after the economic and social recovery，a reduction in the decline of investment in real estate development driven due to the release of backlog of residents’ home purchase demand，fiscal and monetary policies efforts to support infrastructure investment to play a supporting role，and resilient exports driven by the accelerated recovery of production capacity.

However，after entering the second quarter，the economic recovery slowed down，and most indicators peaked and fell. GDP grew 6.3% year-on-year in the quarter，equivalent to a two-year average growth rate of 3.3%，down from 4.7% in the first quarter. And quarter-on-quarter growth was 0.8%，down from 2.2% in the first quarter.

The slowdown in economic growth in the second quarter was mainly due to the following factors. Firstly，exports were sluggish due to the slowdown in external demand and geopolitical factors. Moreover，due to factors such as unstable expectations and overcapacity，private enterprises were reluctant to expand production. Thirdly，the unemployment rate rose，which affected residents’ consumption and their willingness to increase leverage. Lastly，the real estate market is cooling. Pressure on local government debt increased due to several factors，such as declining demand for new home purchases and a cooling market，compounded by weaker market expectations and a reluctance to increase leverage.

After entering the second half of the year，with the policy of increasing macroeconomic regulation and control，the economy showed signs of marginal improvement. In the third quarter，GDP grew by 4.9% year-on-year，better than market expectations. The two-year average growth rate was 4.4%，1.1 percentage points higher than in the second quarter，and the seasonally adjusted quarter-on-quarter growth rate was 1.3%，which was also better than that in the second quarter.

Since the second half of the year，the economy has recovered mainly along three main lines: The first is that employment and income have supported the recovery in household consumption. Urban unemployment continued to decline，and residents’ consumption trends continued to rise，providing a strong impetus for economic recovery. The second is the new growth momentum under industrial upgrading and structural optimization. High-end manufacturing industries，represented by new technologies and new energy，played a key supporting role in supporting industrial production，investment，and foreign trade. The third is that the effects of policies continued to be released. Since the Politburo meeting in July，various measures aimed at promoting the development and growth of the private economy，stabilizing the real estate market and issuing special refinancing bonds have bolstered market confidence.

With the continued effective implementation of policies，the current cycle of economic growth and inflation has essentially reached its bottom. The momentum of stabilization and improvement is tending to be consolidated. It is expected that the decline in China’s exports in the fourth quarter may continue to narrow，and previous policies are expected to support the ongoing stabilization of domestic demand. Considering the low base in the fourth quarter of last year，GDP is projected to rise to about 5.2% in that quarter，achieving the annual growth target of 5.2% successfully.

China’s Economic Outlook for 2024

Looking ahead to 2024，some institutions remain pessimistic about China’s economy. For example，the IMF expects China’s economy to grow by 4.2% in 2024. However，we believe this underestimates the resilience of the Chinese economy.

Firstly，export growth in 2024 will be significantly higher than that of the previous year. The IMF expects the global economy will grow by 2.9% in 2024，slightly below the 3.0% growth forecast for 2023. As interest rate increases in advanced economies may stop or even shift to interest rate cuts，the restraining effect of tighter financial conditions on the economy will weaken. At the same time，the IMF forecasts a real growth rate of 3.5% for exports of goods and services in 2024，up from 1.1% in 2023，suggesting a rebound in global trade growth. In terms of US dollars，China’s annual export growth rate in 2023 is about -5%. Given the low base and the export stimulus caused by the depreciation of the RMB exchange rate，we anticipate a significant turnaround in China’s annual export growth rate in 2024，from a drag on the economy to a positive contributor.

Second，consumption is expected to continue to recover in 2024. Consumption in 2023 is mainly dragged down by two factors: one is the increasing employment pressure leading to slower income growth and a diminished consumption capacity，and the other is a “scarring effect” causing a decline in consumption willingness. Therefore，in addition to relatively high demand for services，consumption of durable goods and commercial housing is relatively weak. From 2024 onwards，both factors are likely to diminish. The employment pressure is expected to ease with the recovery of the export industrial chain and the implementation of various stable employment policies. And the “scarring effect” is anticipate to be weakening over time. We believe that consumption，especially commodity consumption，will improve in 2024 and continue to play the role of ballast stone for economic growth.

In conclusion，the probability of investment will remain stable in 2024. This expectation is grounded in the analysis of three fundamental pillars of investment.

First，infrastructure investment. In a rare move，China has raised its budget deficit for the year in October 2023. The plan is to issue an additional 1,000 billion yuan of government bonds，and these funds will be allocated to local governments for post-disaster reconstruction through transfer payments. Specifically，500 billion yuan will be utilized in 2023，while an additional 500 billion yuan will be carried over to 2024. This has released signals to the market，one of which is that the central government will increase leverage in place of local governments，and the other is that infrastructure will continue to strengthen. Given the modest growth rate of infrastructure investment in 2023，we expect the pace of growth to remain stable and moderate in 2024，driven by the low growth trajectory from the previous year.

Second，investment in manufacturing. The outstanding investment in high-tech manufacturing in the sector in 2023 is inseparable from robust exports and policy support. Looking ahead to 2024，these supporting factors persist. On the one hand，external demand is expected to recover gradually，which in turn will drive exports，especially exports of high-tech products，to rebound. On the other hand，the recent high-level frequent emphasis on the development of new industrialization and advanced manufacturing industries will prompt China to intensify the implementation of the ten key industries to stabilize the growth of the work plan. In addition，the profit growth rate of industrial enterprises is expected to rebound significantly in 2024，coupled with the gradual recovery of business confidence，which help the growth rate of manufacturing investment pick up.

Finally，real estate development. In 2023，the real estate industry declined after the small peak season in the first quarter，and the market has formed a negative feedback chain of “declining prices - weak sales - difficulty in recovering payments - declining land acquisition - declining investment”. In the middle of the year，the government emphasized “promoting the steady and healthy development of the real estate market” and introduced policies to stabilize the market. However，the relationship between supply and demand in the market has undergone major changes，and the effect of the policy needs to be further revealed. Looking ahead to 2024，we tend to believe that the growth rate of investment in real estate development will decline slightly. On the one hand，the transformation of urban villages and the acceleration of affordable housing construction are expected to help stabilize the growth rate of investment; on the other hand，the implementation of preferential measures such as mortgage interest rate reductions and down payment reductions for house purchases are expected to boost some rigid and improving demand.

In conclusion，we are not pessimistic about the performance of China’s economy in 2024. In the post-pandemic era，economic recovery is a gradual process with wave-like development and zigzag progress. Twists and turns during this period are certainly unavoidable，especially some uncertain factors inside and outside may cause disturbances to economic development in stages. However，the economic growth rate will gradually converge to the potential level as economic operations normalize.

China’s Macro Policy Outlook for 2024

At the end of October 2023，the Central Financial Work Conference was convened. The meeting sets the tone for policies over an extended period，providing a basis for speculation about the upcoming year.

Firstly，the monetary policy is expected to remain robust. The Central Financial Work Conference called for efforts should be made to create a sound monetary and financial environment，and to effectively strengthen high-quality financial services for major strategies，key areas and weak links. The soundness of monetary policy should always be maintained，more attention should be paid to cross-cyclical and counter-cyclical adjustments，and the monetary policy toolkit should be strengthened. The dual adjustment of the money supply aggregate and the structure should be strengthened.

Cross-cyclical and counter-cyclical adjustments indicate that monetary policy implementation would consider both short-term and long-term factors. The dual adjustment of aggregate and structure show that monetary policy must not only maintain reasonable and abundant liquidity through aggregate policy and continuously reduce financing costs，but also strengthen support for scientific and technological innovation，advanced manufacturing，green development，and micro，small and medium-sized enterprises. Specifically，by 2024，China's monetary policy may experience fewer external constraints as the Federal Reserve contemplates a shift to a less restrictive monetary policy stance. This could lead to lower reserve requirements and lower interest rates.

Moreover，fiscal policy will persist in efforts to improve efficiency. The Central Financial Work Conference particularly emphasized the establishment of a long-term mechanism to guard against and defuse local debt risks，the creation of a government debt management system that is compatible with China’s pursuit of high-quality development，and optimization of central and local government debt structures. In addition to specific measures such as special refinancing bonds swaps，there should be further institutional framework design in this round of debt. Also，the central government may assume more responsibility for increasing leverage in the future，which is corroborated by the issuance of an additional 1,000 billion yuan of government bonds to break through the deficit ratio limit. Accordingly，the deficit ratio target for 2024 is likely to be set at around 3.5%，and new special bond issuance may remain flat at 3,800 billion yuan，with the overall tone continuing to be positive.

Finally，the real estate policy is expected to be stable. The Central Financial Work Conference called for satisfying the reasonable financing demands of real estate enterprises of different types of ownership without discrimination，making good use of the policy toolkit according to the city’s policies，and better supporting the demand for rigid and improved housing，and accelerating the construction of three major projects such as affordable housing，and building a new model of real estate development.

These statements correspond respectively to the supply side，demand side，and long-term mechanisms of the real estate sector. We believe that meeting the reasonable financing needs of real estate enterprises is a crucial breakthrough to alleviate the urgent debt situation for companies and mitigate risks in the real estate market. In addition，supporting rigidity and improving demand is fundamental to stimulating demand release and reversing the market downturn. Accelerating the construction of the three major projects is a key measure to boost market expectations and promote market stability.

In summary，all macro policies are expected to maintain consistency and flexibility in 2024. The primary focus of monetary policy will be to foster a favorable monetary and financial environment. The main objective of fiscal policy will be to increase the central government's leverage and reduce the risks posed by local governments. Lastly，the primary objective of real estate policy is to promote the steady growth of the market. Continued implementation of policy effects is expected to guide the economy on a steady developmental path. 

The author WEN Bin is the chief economist of China Minsheng Bank

The author WANG Jingwen is the director of the Macro Research Center of China Minsheng Banking Research Institute