Economy

China faces into an uncertain 2024 with an economy hobbled by a drawn-out property crisis

Continuing fallout from Covid and a sharp slowdown in foreign investment also weigh on economic health

Cargo ships at the high-tech and highly innovative Qingdao port in China's eastern Shandong province, which has been one of the few bright spots for Chinese trade. Photograph: STR/AFP via Getty Images

Denis Staunton's face
Denis Staunton
Sat Dec 30 2023 - 06:00

At Qingdao port in China’s Shandong province, a giant standing crane is lowering one container on to the dock while others are gliding along on driverless vehicles. The crane is powered by hydrogen and the entire operation is automated and controlled by a 5G connection that uses data from 30 high-definition cameras.

The port is the first of its kind in the world and it exemplifies the way Chinese industry is leading the way in some innovative technological applications and sustainable energy. But while Qingdao saw its traffic increase in 2023, the broader picture for Chinese exports was bleaker and November’s figures were the first in six months to show a year-on-year increase.

It has been a disappointing year for the Chinese economy, as the recovery that followed the end of three years of zero-Covid policies proved much weaker than expected. The International Monetary Fund (IMF) said it expects the Chinese economy to grow by 5.4 per cent this year but to slow to 4.6 per cent in 2024.

Although analysts identify a number of problems that are holding the economy back, the most commonly cited is a prolonged downturn in the property market. The crisis has not only pushed some of China’s biggest private developers to the verge of bankruptcy but has hit related sectors including appliances.

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With more than 60 per cent of household wealth invested in property, the downturn in the market has made consumers more reluctant to spend. And it has had a huge impact on the finances of China’s debt-laden local authorities, which draw much of their revenue from leasing land to developers.

Wang Tao expects property sales to stabilise in the coming months but that there would still be a 10 per cent decline in housing starts and a 5 per cent decline in home sales for 2024 as a whole

“When property is weak but also given the last few years of a very weak economy and the zero-Covid policy and so on, local government’s finances have been severely challenged and local governments have a lot of debt and they are running into payment issues,” said Wang Tao, chief China economist and head of Asia economic research at UBS in Hong Kong and author of Making Sense of China’s Economy.

“To make their payment current, many local governments then cut their general spending, including cutting down some payments or compensation to the public sector and increasing arrears to companies and so on. The result of that of course it hurts the confidence, but it’s also a tightening of fiscal spending and that’s hurting the overall economic recovery as well.”

[ Foreign investors unwind $33bn bet on China growth rebound ]

The authorities have introduced a succession of measures to support the housing market, including easing lending rules and restrictions on buyers of multiple properties. The government issued a 1 trillion renminbi (€129 billion) special treasury bond and issuing swap bonds to help ease local authority debt.

Wang expects property sales to stabilise in the coming months but that there would still be a 10 per cent decline in housing starts and a 5 per cent decline in home sales for 2024 as a whole. This would mean that, with the decline slowing, the property market would be less of a drag on the overall economy.

She expects the economy to grow by 4.4 per cent next year, with exports recovering as the global technology product cycle bottoms out and starts to improve. This should help sales of electronics products including computers and mobile phones.

One of the most dramatic developments in the Chinese economy has been the collapse in Foreign Direct Investment (FDI), which turned negative in the third quarter of 2023 for the first time in 25 years. This suggests that foreign companies have been taking more money out of the country than they have been putting in.

“I think definitely firms have been facing pressure to de-risk from China, from their customers, from their governments, that I’m aware of. Especially in some of the sensitive industries but even in not-so-sensitive high-tech industries, I understand that foreign companies have faced that pressure to move away some of the production from China,” Wang said.

[Investment adviser Denis Depoux] said that while businesses in Europe and the United States have seen numerous cycles of crisis, recovery and growth, Chinese companies have no playbook for dealing with a slowing economy

“There are also a number of other factors, for example, the fact that China was in the zero-Covid policy for so long. Even at the beginning of this year, the resumption of connections between China and the rest of the world in terms of flights and visas and so on was still very slow. I think the lack of human interactions and exchanges and so on probably have led to a decline in foreign investment, at least delays in foreign investment. As things improve and normalise, I think some of that could come back.”

As the Shanghai-based global managing director of business consultancy Roland Berger, Denis Depoux advises foreign investors as well as Chinese companies, both private and state-owned. He said that while businesses in Europe and the United States have seen numerous cycles of crisis, recovery and growth, Chinese companies have no playbook for dealing with a slowing economy.

[ Crisis of confidence leaves Chinese economy caught in post-Covid maze ]

“The playbook around performance improvement, top line and bottom line, is very clear for people who have experienced this before. But in China, nobody’s experienced this before,” he said.

Denis Depoux, managing director of business consultancy Roland Berge, who advises foreign investors and Chinese companies. Photograph: Pedro Pardo/AFP via Getty Images)

“Nobody has experienced a slowdown in the economy and nobody knows how to handle this.”

He said that Chinese business leaders are reluctant to cut costs by targeting headcount and procurement, preferring to seek new outlets such as export markets. This has meant they have been slow to consolidate and to adjust their footprint to their economic prospects.

“I think that’s two thirds or three quarters of the reason why the Chinese economy this year has lost a bit of its dynamism, its vitality. It’s because leaders do not have the playbook,” he said.

“The debt challenge for local financing vehicles, okay, it’s a huge challenge. I would not argue against this. But for you and I, the playbook is very clear. You have a big debt problem, you have some assets. You sell the assets. And you sell them maybe at a loss, but you restore the health of your balance sheet. That’s what we’re taught in business school. But of course that playbook around asset sales and privatisation is also bumping into ideological constraints.”

Although Depoux is not bullish about the Chinese economy in 2024, he is not bearish either and he believes that the fundamentals of the economy remain strong. He points to the enduring strength of China’s industrial clusters, which he suggests have been reinforced by large investment during the Covid years, particularly in automation and often with a lower carbon footprint.

The success of Chinese electric vehicle manufacturers was one of the big stories of 2023 as rivals in Europe feared the EV market could go the way of that in solar panels, batteries and wind turbines. But Depoux notes that China has also become highly sophisticated in the production of speciality chemicals, currently focusing on the domestic market but likely to look further afield before long.

“The good news about the economy slowing down is you have also some private companies that are in difficulties in China, and therefore they are quite open for acquisition. We see it in speciality chemicals, like coatings, paintings. We see it in packaging, we see it in food ingredients, we see it in electrical equipment. We see western companies, American, Irish, actually – think of your Kerry – we’re seeing all these companies in the last two or three years, but accelerating this year, going for acquisitions in China,” he said.

‘I think one needs to understand that while China faced significant challenges over the last 40 years, almost at every step of the way, policies have been adaptive and pragmatic most of the time to address the issues or the challenges arising’

—  Wang Tao, chief China economist and head of Asia economic research at UBS in Hong Kong

“Quite often it’s part of their existing supply chain. They acquire private companies that were their suppliers, sometimes their competitor’s competitor, because they’ve become good. You would never acquire a company that is simply a low cost company. You keep it as your supplier. But if you’re starting to have companies that are actually very good at production, so they really have high-quality, good yield, etc, why not?”

The gloomy economic news from China in 2023 has prompted some western analysts to declare the end of China’s economic miracle and to predict that the country is destined to fall behind in its contest with the US. But after decades observing the Chinese economy, Wang warns against extrapolating from the country’s current troubles.

“I have seen in my long career many people extrapolating, and 20-plus years ago, there was this famous book about the coming collapse of China that even predicted within five years it was going to collapse. Of course, that didn’t happen. And 10 years ago there were academic papers about China’s growth being about to collapse to the average, and that also did not happen,” she said.

“I think one needs to understand that while China faced significant challenges over the last 40 years, almost at every step of the way, policies have been adaptive and pragmatic most of the time to address the issues or the challenges arising. China’s economy and the growth model and policy priorities are evolving, they are dynamic.”

ChinaInternational Monetary FundUBSCovid-19