The Chinese economy has seen a remarkable rise in the last few decades to become the world’s second largest. However, that progress has tailed off in recent years. Measured at market exchange rates, China’s economy peaked at 75% of the size of the U.S. economy in 2021; last year, that figure had slipped to 65% due to a weaker yuan and soft economic momentum in China. The road ahead appears uncertain; tensions with the West, population decline, a lack of market-oriented reform and a creaking property sector all threaten to throw China’s economic progress off course.
The economy is currently muted:
China’s economic data has been lackluster recently. GDP growth slowed to 4.9% year on year in Q3 and undershot market expectations in Q4 despite picking up due to a more favorable base effect. The export sector has underperformed that of other East Asian economies despite a return to growth in November and December. Moreover, real estate indicators for China’s economy remained deeply negative across the board in the second half of 2023, despite multiple policy easing measures at the local and national level, including cuts to mortgage rates and deposit ratios.
GDP growth to slow ahead:
China’s economic growth in 2024 is projected to be among the slowest in decades. Likely further rate cuts will only partly offset the impact of Western trade and tech restrictions, a still-soft property sector, deteriorating demographics, and regulatory uncertainty. Looking beyond 2024, our Consensus is for the economy to continue to slow throughout the 2020s as a falling population exerts an increasing drag on activity. Moreover, a lack of pro-market reforms and Western trade and tech restrictions will hamper China’s productivity growth.
Chinese yuan to strengthen:
Following currency weakening in 2023, the CNY is set to appreciate from current levels going forward on a narrowing interest rate differential with the U.S. While the People’s Bank of China is seen cutting rates ahead, the U.S. Federal Reserve is forecast to reduce its interest rates by far more, supporting the yuan. However, the currency will remain weaker than the levels reached during the mid-2010s—a time of peak optimism over China’s economic future. Lingering concerns among investors over the country’s economic policy direction and Western trade and tech restrictions will keep a lid on the yuan.
Insight from our analysts:
On China’s slowdown, Goldman Sachs analysts said:
“As China’s economy sputters, investors are asking whether the country could repeat Japan’s experience in the 1990s. […] While deteriorating demographics, a debt overhang, and an asset-bubble-burst were all important ingredients to Japan’s malaise at the turn of the century, a key contributor to its Japanification was a fundamental change in longer-term growth expectations […] growth expectations in China, which is also coping with worsening demographics, a debt overhang, and a deflating property market, are showing signs of a downward drift, but there are ways policymakers can avoid a Japanese-style slump.”
On near-term prospects for China’s economy, Nomura analysts said:
“There might yet be another economic dip in spring 2024 due to a worsening property sector, with the delayed delivery of numerous homes, the fading of pent-up demand, weaker external demand, a slowdown following the investment fervour in “green” sectors and lasting geopolitical tensions. That said, we hold the hope that, by the spring of 2024, […] the pain of another economic dip may finally convince Beijing to identify the real pain points, roll out truly effective measures to help deliver presold homes, clean up local governments’ financial messes and ramp up fiscal spending in the right places.”
Our latest economic report on China has even more insight into the outlook for Chinese GDP, inflation, monetary policy and exchange rates, including our Consensus Forecasts and sample panelist breakdowns for 2024 and 2025.
