China's GDP may grow at 4.4% in 2024, says UBS, lists 6 key themes that may shape its economy

During today's media briefing on the UBS 2024 macroeconomic outlook, Tao Wang, the Chief China Economist and Head of Asia Economics at UBS, outlined several important themes and potential surprises that could shape China's economy in 2024. Wang stated that they believe 2024 will be a year of economic stabilisation and consolidation for China. However, there is still a downward force because China is still experiencing a severe real estate market downturn. This year, they anticipate that gross domestic product (GDP) growth will level off at a rate of roughly 4.4 to 4.5%.

“We project China’s economy to grow by 4.4% in 2024, as the base effect of post-Covid recovery fades and property downturn continues to be a drag. We expect infrastructure investment to slow slightly despite more explicit fiscal support, and exports improve on the upswing of the global tech cycle. We foresee CPI inflation rise to 0.8% in 2024 and USDCNY trade at 7 at end 2024,” said Wang in a report. 

In November 2023, UBS revised India's real GDP growth higher by 20bps, to 6.2% YoY, for FY25E (versus 6.3% YoY for FY24E and consensus at 6.4% YoY), in their report, despite slower global growth.

“Looking further ahead, we expect India's growth to stabilise towards the long-term averages of 6.2% and 6.5% in FY26E and FY27E, respectively,” said UBS in its report. 

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Key macro themes for China in 2024

Tao Wang stated that property stabilisation, debt restructuring, and economic transition, would be the three main themes steering the economy.

Property Stabilisation

Given the significant decline in the real estate market, in H1 2024, it is anticipated that, with further policy support, property sales and starts will stabilise at low levels.

According to Wang, they have not quite reached their lowest point over the past few months despite being extremely weak. They therefore hope that at some point during this half-year, they will stabilise and then somewhat recover.

“We foresee 2024 annual sales to decline by 5%, new starts by 10%, and property investment by 5%, and property’s drag on GDP growth should drop from 1.5-2ppts in 2023 to 1-1.5ppts in 2024,” said Wang. 

She also emphasised that, assuming a stabilised real estate market, they anticipate that household income and labour market normalisation will persist in 2024, driven by a continued recovery in the services sector, with real household income expanding by roughly 5%.

“We expect household confidence to remain weak but does not worsen significantly further, which means some excess savings will be released to help boost consumption. However, as base effect fades, we forecast services consumption growth to slow in 2024 and total real consumption to grow by 5.5%,” she said. 

Debt Restructuring

Second, the Chinese government gets a large portion of its income from land and property. Therefore, the weak real estate market will keep putting a strain on local government budgets and raising debt repayment issues. Thus, they anticipate greater explicit assistance from the central government.

“As a response, we expect the central government to continue with the restructuring of implicit local government debt in 2024. Since most LGFV debt is held by banks, much of the restructuring will be negotiated with banks by extending loan durations with lower interest rates. We also expect another RMB 2-3 trillion of LG bonds to be issued to swap some LGFV debt and corporate arrears. PBC may continue providing emergency liquidity facility to heavily indebted regions in addition,” highlighted Wang in the report. 

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Economic structure and growth drivers to start to shift

Property will no longer be the strong growth engine it once was due to the severe downturn and much reduced long-term demand. Over time, heavy industries and associated infrastructure investments will also lose significance in the economy. In the meantime, the economy's shift to greener production and transportation (like EVs), renewable energy, and the continuous rise in consumer services should help partially fill the void left by traditional drivers of growth. These factors include industries moving up the value chain and upgrading technologies.

Modest macro policy support

Wang stated that 2024 will be a year of stabilisation and consolidation, as previously mentioned. The authorities, in this case, are clearly becoming more conscious of the negative effects on the economy. In an effort to stabilise the real estate market, they have developed a number of policies, such as financing for social housing and so-called urban village renovations. In order to increase demand, they have also lowered the required down payment and mortgage interest rates. It is also anticipated that they would give developers a little bit more credit support.

“The Central Economic Work Conference made it clear that macro policies are to remain supportive. We expect general government budget deficit to be 3.5-3.8% of GDP in 2024 (including possible new issuance of special treasury bonds), special LG bonds to increase to RMB 4 trillion to help support infrastructure investment, and another RMB 2-3 trillion of swap refinancing LG bonds (2023: RMB 1.4trn). We see only 10-20 bps rate cut and 25-50 bps RRR cut in 2024, as monetary policy focuses on ensuring sustained credit growth of 9.5%,” the economists highlighted in the report. 

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RMB exchange rate to appreciate

As outbound travel recovers more, UBS economists predict that China's current account surplus will decline in 2024. However, a modest RMB appreciation against the USD in 2024 should be supported by the US-China yield spread narrowing, an anticipated decline in the USD, and the stabilisation of China's economy.

“In the first few months of the year, USDCNY could still move higher (7.2 or 7.3 for example) as USD and US yields fluctuate, and China ease monetary policy. But USDCNY should move lower subsequently, with growth and inflation falling in the US and China showing clear signs of stabilising in H2, and trading at around 7.0 at year end,” said UBS in its report.

CPI to climb out of deflation

As the price of pork enters an upcycle, energy prices cease to decline, and domestic consumption continues to slowly recover, the CPI is predicted to emerge from the current deflation and average 0.8% (as opposed to 1.2% previously predicted) in 2024. Upstream product demand should be generally soft due to the sustained weakness in real estate development and the only moderate growth of infrastructure investment.

Possible surprises in 2024 for China

The economists in the report outlined a few possible surprises for the Chinese market in 2024. The possibility that the property activities won't stabilise was mentioned in the report. The real estate market is the source of the greatest economic uncertainty. Property-related activities might not stabilise this year compared to our baseline forecast because of the shaky sentiment, high inventories, and limited policy support.

Second, the rebound in consumption might let us down once more. In the event that the real estate market does not stabilise and prices fall abruptly in 2024, the household balance sheet would suffer and consumer confidence might drop dramatically.

Thirdly, either way macro policies could surprise. The problems with local government funding may require more than just fiscal expansion and debt restructuring. This would result in further payment problems and corporate sector arrears, or it would essentially mean another round of fiscal tightening through general government spending reductions.

Finally, the external environment and US-China relations could take us by surprise, and the RMB could appreciate or depreciate more than anticipated.

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