China's economy on stable, positive trajectory

Supported by coordinated macroeconomic policies, China's economy achieved a strong start in the first quarter of 2024, demonstrating a stable and positive trajectory.

As the second quarter unfolds, the international economic environment continues to be marked by complexity and uncertainty.

The possibility of a postponement in interest rate cuts by the US Federal Reserve looms. Factors such as stronger-than-expected economic growth in the United States and a slowdown in the pace of inflation might lead the Fed to defer the anticipated rate cuts at the end of the second quarter, potentially reducing the magnitude of the cuts as well.

Increased volatility is expected in international financial markets. The rise in US bond yields places equity markets at risk of a downturn, raising concerns of a potential correction in US stocks. The US dollar is anticipated to receive robust support, putting continued pressure on other key currencies. Though short-term pressure is anticipated with respect to gold prices, there is the possibility of a rebound in the medium term.

Cross-border capital flows are projected to gradually return to emerging markets, with those in Asia expected to experience pronounced net inflows. This trend signifies renewed investor confidence in these markets, driven by factors such as attractive growth prospects, favorable demographics, and ongoing structural reforms in certain economies.

As reflected in the progress of fiscal policy in the first quarter, China had taken the comprehensive approach of appropriately enhancing the intensity and strengthening the effectiveness. In the second quarter, multiple measures will be implemented to ensure a reasonable expansion of fiscal policy.

These measures include the effective implementation of structural tax cuts and fee reductions, increased support for industrial transformation and upgrade, and enhanced expenditure in the livelihood sector.

The accelerated pace of local government bond issuance and the timely launch of 1 trillion yuan ($138 billion) in ultra-long-term special government bonds are particularly significant. It is expected that the issuance of local government bonds, especially new special bonds, will accelerate between April and May.

Based on historical experience, there is a higher possibility that special government bonds will be issued in the third quarter. However, it cannot be ruled out that, in order to quickly generate physical workloads, the issuance may begin late in the second quarter.

In the first quarter, China's monetary policy effectively played a dual role of managing overall liquidity and promoting structural adjustments, releasing a series of unexpectedly accommodative signals. In the second quarter and the latter half of the year, the stance of monetary policy will remain prudently accommodative, aiming to create a favorable monetary and financial environment for the continued improvement of the economy.

There is a possibility of further reserve requirement ratio cuts in the second quarter or later in the year, with targeted reductions being the primary approach. It is expected that the second reduction in the RRR could be more focused on specific sectors or institutions. Additionally, there is room for a decrease of 10-20 basis points in the medium-term lending facility rate, and the loan prime rate may also be adjusted accordingly.

In addition to traditional measures, structural monetary policy tools such as promoting technological innovation and facilitating technological transformation through relending will be comprehensively utilized. These tools will enhance guidance and incentives for financial institutions, promoting the flow of credit to key sectors and supporting the structural adjustments needed for sustainable growth.

Coordinated steps

Close coordination and cooperation with fiscal policy will be strengthened to ensure the smooth issuance of government bonds. This is aimed at maintaining stability in the bond market and facilitating the financing needs of the government while ensuring favorable borrowing costs.

As the economy continues to recover, leading to improved employment conditions and an increase in consumption scenarios, domestic demand is playing a pivotal role in driving consumption recovery.

The sustained rebound in domestic demand is being propelled by the growth of infrastructure investment, manufacturing sector investment, and the stabilization and recovery of real estate investment. Investment will continue to contribute to stable economic growth, with an accelerated contribution to GDP.

Improved external demand, advantages across the entire industry chain, and ongoing structural transformations and upgrades in exports will continue to support a positive export performance.

It is projected that GDP growth will reach around 4.5 percent in the second quarter. With the effective implementation of relevant policies, there is room for the economy to surpass expectations and achieve a rebound in growth over the next three quarters.

Consumer spending is expected to grow by 7.4 percent in 2024, contributing to some 50 percent of GDP. Capital formation is projected to increase by 3.8 percent, contributing to around 35 percent of GDP. Net exports are forecast to grow by 2 percent, contributing to about 15 percent of GDP. Overall, the annual GDP growth is expected to be around 5.3 percent.

Following the second quarter, investments in infrastructure and the manufacturing sector are expected to maintain high growth rates, while the decline in real estate investment will narrow. These factors combined will contribute to the sustained growth of fixed-asset investment.

With the effects of countercyclical policies becoming evident, strong fiscal support, and an abundance of major projects, infrastructure investment will play a significant role in stabilizing the economy.

The demand for technological upgrades, improved operating conditions for private enterprises, recovering external demand, the onset of a restocking cycle in China and the United States, and robust policy and financial support will enable manufacturing sector investment to maintain rapid growth, surpassing pre-pandemic levels and strengthening its role in promoting stable economic growth.

It is projected that fixed-asset investment will grow by 4.5 percent year-on-year in the second quarter, with infrastructure investment increasing by 7 percent and manufacturing sector investment growing by 9.5 percent.

For the full year, fixed-asset investment is expected to grow by 6 percent year-on-year, with infrastructure investment and manufacturing sector investment growing by 7 percent and 10 percent, respectively.

In the second quarter, as the employment situation gradually improves and household incomes steadily increase, consumers will gain more confidence and purchasing power. The stabilization of the real estate market typically has a positive effect on related consumption, as homeowners feel more secure about their assets and will be more willing to spend on home-related products and services.

The strong performance of the automobile industry and robust sales indicate that consumers are confident in making big-ticket purchases. This trend is further supported by policies promoting trade-ins for old vehicles, which will have a positive impact on consumer spending.

Additionally, the services sector is experiencing fast growth, driven by increased demand for dining, travel, entertainment and other leisure activities.

The recovery of consumer price indexes is also contributing to an increase in prices of consumer goods, which could stimulate consumption as consumers may opt to make purchases before prices rise further.

It is projected that in the second quarter, the retail sales of consumer goods will grow by 4 percent. The combined effect of these policies could generate an additional consumption increment of around 350 to 400 billion yuan for automobiles and household appliances, contributing to a 0.7 percentage point increase in the year-on-year growth rate of total retail sales of consumer goods in 2024, reaching 6.2 percent.

Following the second quarter, exports are expected to surpass expectations with a positive growth outlook. Overall, external demand continues to gradually recover.

The cyclical recovery in the real estate market and the onset of restocking cycles have strengthened the momentum of recovery of the US manufacturing sector. Demand from emerging economies remains robust.

Internally, the advantages of the entire industry chain, strong production capacity, optimized export structure and a low base year provide support for exports.

Import growth has shown a slight improvement.

Domestic demand remains stable, with consumption steadily recovering and infrastructure and manufacturing sector investments maintaining rapid growth. As the economy continues to recover and China persists in its strategy to expand imports, demand may further recover compared to 2023.

Policy support

In dollar terms, exports are projected to grow by 3 percent year-on-year in the second quarter, while imports are expected to grow by 1 percent. For the entire year, exports are forecast to grow by 2.5 percent year-on-year, with imports increasing by 0.5 percent.

During the first quarter, the real estate market remained in a bottoming-out phase, with concerns still looming over the risks faced by real estate developers. The growth rate of housing credit and off-balance-sheet financing from non-banking institutions continued to decline, while the land market contracted, and the downtrend in real estate investment continued.

Looking ahead to the second quarter, as the high base effect gradually dissipates, housing support policies are expected to take further effect, driving marginal improvements in key indicators such as real estate sales and new construction.

It is projected that real estate development investment will decline by around 9 percent year-on-year in the second quarter, narrowing the decline by 0.5 percentage points compared to the end of the first quarter.

During the first quarter, the overall prices remained at a low level, with the tailing effect contributing to a slight decline in the consumer price index, while the producer price index was dragged down by the decrease in prices of construction materials related to the real estate sector. However, in the second quarter, the price level is expected to gradually rise from the low position.

By the end of the second quarter, it is projected that the CPI will rise to 0.3 percent year-on-year, and the PPI will dip 1.5 percent year-on-year. The price gap between CPI and PPI will narrow to 1.8 percentage points, indicating a relief in downward pressure on prices.

Entering 2024, the US dollar index has displayed considerable resilience, experiencing several phases of rebound, leading to a tug-of-war situation between other key currencies such as the Chinese yuan and the US dollar.

In the medium to long term, relative changes between the economies of China and the US in terms of monetary policy, growth trajectory, price levels and international balance of payments will drive a weakening of the US dollar and a strengthening of the Chinese yuan.

However, in the short term, factors such as the delay in interest rate cuts by the Fed will continue to impact the exchange rate between the Chinese yuan and the US dollar, resulting in periodic fluctuations.

It is projected that in the second quarter, the midpoint of the Chinese yuan against the US dollar exchange rate will exhibit a two-way fluctuation within the range of 6.95 to 7.15, with a higher possibility of stability and a potential uptrend.

In the third quarter and beyond, as the Fed establishes a clear path for interest rate cuts and the Chinese economy further stabilizes and improves, the midpoint of the Chinese yuan against the US dollar exchange rate may continue to rise.

Lian Ping is a council member of the China Chief Economist Forum and head of the Guangkai Chief Industry Research Institute. Liu Tao is deputy head and Ma Hong is a researcher of the institute.