• China is projected to meet its 5 percent growth target in the second half of 2024, raising its average GDP growth to 4.6 percent. First-quarter growth was 5.3 percent, leading some organizations to raise their estimates.
  • A strengthened manufacturing sector has significantly boosted the economy from the sluggish recovery of the labor market and aggregate demand following the COVID-19 downturn. However, an inventory accumulation and a slow improvement in property sales suggest growth momentum will abate in the second half of 2024 and 2025. China is addressing its high debt levels and diminishing returns on investment.
  • To prepare for foreseeable economic challenges and geopolitical tensions, officials aim to implement the “new productive forces” policy, a concept President Xi Jinping introduced in September 2023. This initiative emphasizes innovation in advanced sectors as crucial to economic development.
  • During the annual “two sessions” meetings in April, China’s leadership acknowledged policymaking mistakes that contributed to the current economic slowdown and declared stabilizing economic growth as the top priority for 2024.
  • Beijing will issue a CNY 1 trillion ($138.4 billion) bond this year to provide special funding for strategic sectors, demonstrating the government’s long-term commitment to develop cutting-edge technologies to compete with the United States.
  • The Ministry of Foreign Affairs in April criticized U.S. foreign aid practices, accusing Washington of using aid to maintain hegemony and engage in geopolitical games. The same month, a high-level meeting between Chinese and U.S. envoys highlighted the need for intense diplomacy amid geopolitical tensions and conflict in the Middle East. Both sides agreed to an invest, cooperate and compete framework.
  • The government is expected to implement a series of unconventional fiscal stimulus measures to increase aggregate demand and address domestic imbalances. These may include supporting redistribution programs for pensions and social protection to encourage investment and reduce savings. However, direct consumer stimulus remains unlikely.

China Market Overview and Forecast

Political Climate

China’s Leadership Drives Economic Innovation and Political Reform

In this year’s “two sessions,” the annual meetings of the National People’s Congress and the Chinese People’s Political Consultative Conference, China’s leadership embraced an economic agenda focused on achieving continuous high growth and enhancing productivity through technical innovation. President Xi consolidated his power with the surprising decision to cancel the premier’s traditional press conference, signaling a shift in leadership dynamics. Former Premier Li Keqiang presented his first government work report at the National People’s Congress, outlining key priorities and initiatives for the year.

China convened the long-anticipated third plenary session of the 20th Central Commission for Discipline Inspection January 9 after delays from the previous autumn. During the session, Xi emphasized the importance of combating corruption and advancing reform under the centralized and unified leadership of the Communist Party. The meeting also focused on strengthening party self-governance with enhancements to basic laws and regulations. Officials hinted at significant reforms to promote the current economic strategy of “high-quality development.”

Amid these internal developments, China’s stance beyond the mainland remains firm. In response to the January election results in Taiwan, Beijing reiterated its position that Taiwan’s status is an internal affair, in line with the “one-China” principle. The Chinese government is actively pursuing a strategy to promote peaceful unification with Taiwan, emphasizing diplomatic and economic avenues to avoid escalating cross-strait tensions.

Macroeconomic Climate

China’s Economic Path Emphasizes High-Speed Growth Despite Challenges

Despite the challenges posed by sluggish global demand and structural issues in the real estate sector, China’s economic landscape shows signs of resilience and innovation. This year’s government work report outlined ambitious economic targets for 2024, including GDP growth of around 5 percent and a new goal for cutting energy use by 2.5 percent. Achieving this may prove challenging, given the higher basis of comparison and less favorable market environment compared to last year.

Beijing appears to be cautious on stimulating the economy, avoiding a large-scale stimulus package. Instead, the government plans to issue CNY 1 trillion ($138.4 billion) in special central government bonds with terms of 30-50 years. This strategy aims to leverage the central government’s balance sheet to help cash-strapped local governments deleverage, addressing local government debt challenges more effectively. The government work report also highlighted trade-in campaigns to replace used consumer durables and upgrade used equipment, resembling a “cash for clunkers” program. This initiative could boost 2024 GDP growth 0.8 percent and provide a balanced stimulus to both consumption and investment, though its effects may be temporary. The authorities also increased spending on affordable housing and urban development to offset a major housing downturn.

Officials are working to create a transparent and predictable policy environment, while ensuring the equal treatment of enterprises regardless of ownership, to support investor confidence and encourage private investment. If successful, this will allow market forces to play a greater role in capital allocation while mitigating risks of overcapacity.

Investment Environment

Policymakers Amplify Voices, Drive Economic Growth Initiative

During the “two sessions,” Xi reiterated his views on a technology-centric agenda, emphasizing the need to nurture “new productive forces” and urging local governments to tailor their economic strategies accordingly. This initiative entails a substantial investment of CNY 370.8 billion ($51.3 billion) in technological research to drive advancements in key sectors like electric vehicles, artificial intelligence and renewable energy. It represents a strategic move to position China as a global leader in innovation and technology.

Still, the investment environment in China remains complex and challenging for foreign investors. Despite efforts to improve protections, such as strengthening intellectual property rights, foreign investors continue to face an unpredictable regulatory environment and restrictions in key sectors. This uncertainty could make investors less willing to commit to long-term ventures in China.

By 2025, expanding social housing and renovating urban areas could mitigate the property investment downturn, but these initiatives may not directly address the lack of confidence in developer presales of housing. China’s position as a global manufacturing hub is expected to remain strong, with cyclical demand for exports likely to stay robust. Despite concerns about deglobalization and de-risking, supply chains are lengthening, and investments in countries like Indonesia and Vietnam are often by Chinese manufacturers expanding their own supply chains.

Six months after China’s implementation of the “24 measures” aimed at attracting foreign direct investment and optimizing the business environment, progress updates highlight successes such as roundtable discussions with foreign-invested enterprises and extensions of tax breaks for foreign employees and domestic research and development equipment purchases. However, work is needed to improve intellectual property rights and facilitate cross-border data flows. Minister of Commerce Wang Wentao reported that 60 percent of the policy measures have been implemented or made steady progress, with 10 policies completed, 28 making progress and 21 continuing to advance. Despite these efforts, challenges remain, including restrictions on foreign investment in key sectors and an unpredictable regulatory enforcement.

We will continue to keep you updated on developments in China as they occur. If you have any comments or questions, please contact BGA Adviser Eric Wang at ewang@bowergroupasia.com.

Best regards,

BGA China Team