Q&A on Chinese economy: Sustaining growth and tackling challenges

The Chinese economy has experienced an uneven yet resilient growth trajectory in 2024, with a strong start followed by increasing downward pressure around mid-year and a subsequent upswing in the final quarter.

As the year draws to a close, and with an uncertain 2025 right around the corner, China's economic outlook and policies have garnered global attention. The following Q&A offers a glimpse into the country's efforts to sustain growth and resolve issues in fields ranging from local government debt to the real estate market.

WILL CHINA ACHIEVE ITS ANNUAL GROWTH TARGET?

China's economic growth remained steady in the first three quarters of 2024, with GDP up 5.3 percent, 4.7 percent and 4.6 percent year on year, respectively. Despite fluctuations, the figures have remained within the targeted range. On a quarter-on-quarter basis, the economy has reported expansion for nine consecutive quarters.

The stable performance proves that China has managed to navigate a challenging situation this year, withstanding global economic headwinds and pressures from domestic structural problems.

Experts believe that there has been a solid foundation for the economy to meet the full-year growth target of around 5 percent.

China has responded to emerging economic challenges with timely macroeconomic policies this year. In particular, the government has rolled out a series of incremental measures since September, including increasing local government debt quotas to replace hidden debt, easing real-estate regulations, directing long-term capital into the market, and increasing support for struggling businesses.

The policies have begun to bear fruit. In the fourth quarter, consumer demand has picked up, the stock and real-estate markets have become more active, and business expectations have also improved.

The main goals and tasks for economic and social development in 2024 will be successfully accomplished, according to a crucial meeting convened on Monday by the Political Bureau of the Communist Party of China (CPC) Central Committee.

Globally, China's growth rate continued to take the lead. In the third quarter, the United States saw a 2.8 percent year-on-year increase, while the Eurozone grew by 0.9 percent.

China will be the top contributor to global growth over the next five years, according to Bloomberg calculations using IMF forecasts.

IS CHINESE CONSUMPTION FACING A CRISIS?

There have been concerns over China's consumption momentum this year. However, the country, while indeed facing insufficient domestic demand, remains one of the world's largest consumer markets and still boasts enormous potential.

A McKinsey report recently denied any consumption crisis in China, noting that "domestic consumption, though modest, is growing" and sectors including services and tourism are experiencing robust growth.

"The transition from an export- and investment-led growth model to one based on domestic consumption and innovation amounts to a fundamental structural transformation," Nobel laureate economist Michael Spence wrote in a signed article.

In the first 10 months of this year, the country's retail sales approached 40 trillion yuan (5.57 trillion U.S. dollars), and the figure exceeded 47 trillion yuan in 2023.

A national program aimed at promoting consumer goods trade-ins demonstrated the untapped room of China's domestic demand. Over 30 million participants have been attracted to the program unveiled in March, contributing total sales of more than 400 billion yuan.

More encouraging signs emerged in October, with the highest year-on-year growth in retail sales since March, a rebound in home transactions in eight months and a turnaround in consumer confidence after a six-month decline, as well as a 150-percent surge in stock-market turnover.

Multiple institutions attribute recent improvements in the economy to stronger domestic demand. Experts believe that with a population of over 1.4 billion and a growing middle class, China's consumption potential remains substantial.

HAS CHINA'S REAL ESTATE MARKET BOTTOMED OUT?

The Chinese authorities have introduced a series of measures to stabilize the real estate market this year, with loosened restrictions and stronger credit support.

Various indicators suggest that the move has begun to achieve positive effects. According to the Ministry of Housing and Urban-Rural Development, transactions of new and second-hand homes nationwide reversed eight consecutive months of decline in October. The business activity and market expectations reflected in the purchasing managers' index for the sector rose steadily in October from the previous month.

After three years of adjustment, "the real estate market is starting to bottom out as the policies take effect," the ministry said. "The positive changes in October suggest that as policy impacts continue to unfold, the momentum for market stabilization will strengthen," said the National Bureau of Statistics.

While the market stabilization indicates policy effectiveness, more work should be done to promote the sustainable development of the property sector.

In the longer term, there is still room for growth in meeting rigid and upgraded housing demand, analysts said. As China progresses through the later stages of urbanization, the continued promotion of people-centered urbanization is expected to unlock further potential in the real estate market.

IS CHINA'S DEBT RELIEF PLAN SUFFICIENT?

Last month, China unveiled a 12-trillion-yuan policy package to tackle the growing risk in hidden debt among local governments, an issue that has received considerable global attention.

The total hidden debt that needs to be addressed by the end of 2028 will be cut from 14.3 trillion yuan to 2.3 trillion yuan, significantly mitigating the potential risk and making local debt management more orderly and transparent.

The policy is seen as a timely boost for local governments, which are projected to save around 600 billion yuan in interest payments over the next five years. With more than 80 percent of national fiscal spending coming from local governments, alleviating their debt burden will free up more resources to support economic growth, public services and social welfare.

China's government debt-to-GDP ratio stood at 67.5 percent at the end of 2023, compared to the average 118.2 percent among G20 nations and 123.4 percent for G7. The country's fiscal deficit has long been below 3 percent, significantly lower than other major economies around the world.

With a low government leverage ratio, China's central budget has room for increased borrowing and deficit expansion, experts said.

The meeting of the Political Bureau of the CPC Central Committee on Monday pledged to adopt a more proactive fiscal policy next year. Minister of Finance Lan Fo'an has said that the ministry will increase special bonds, continue the issuance of ultra-long special treasury bonds, step up support for equipment and consumer goods renewals, and expand central transfers to local governments.

HAS FINANCIAL SUPPORT FOR THE ECONOMY WEAKENED?

China's credit expansion has slowed this year, with yuan loans growing at single-digit rates and the broad money supply (M2) reaching a historic-low growth rate. It has sparked concerns regarding whether financial support for the economy has weakened.

In fact, China has stepped up counter-cyclical adjustment and adhered to a supportive monetary policy in the face of downward pressure to create a sound financial environment for economic recovery.

The People's Bank of China (PBOC), the central bank, has this year cut the reserve requirement ratio by 1 percentage point in total for financial institutions, releasing approximately 2 trillion yuan in long-term liquidity. The one-year Loan Prime Rate (LPR) has dropped a cumulative 35 basis points, with the over-five-year LPR down by 60 basis points.

Thanks to the measures, the financing costs have dropped for both enterprises and individuals, and credit demand has been effectively stimulated. In the first three quarters of the year, major financial institutions issued over 110 trillion yuan in loans, representing an increase of nearly 8 trillion yuan compared to the same period in 2023 and 20 trillion yuan compared to 2022.

Since September, financial authorities have introduced a range of measures to address new challenges, such as insufficient demand and weakened expectations, with significant cuts in the interest rates for existing home mortgages and the creation of new financing tools for the capital market.

Looking forward, China's monetary policy stance is still closely watched by global experts and investors. The meeting of the Political Bureau of the CPC Central Committee on Monday pledged to adopt a moderately loose monetary policy next year, marking the first "prudent" to "moderately loose" transition in the country's monetary stance since 2011.

The central bank will utilize a variety of monetary policy tools and increase countercyclical regulation to maintain reasonable and ample liquidity, and to reduce the overall financing costs for enterprises and residents, PBOC governor Pan Gongsheng said earlier this month.

Efforts will be made to effectively leverage structural monetary policy tools to promote the stable development of the real-estate market and capital market, Pan said.