Five big uncertainties facing the Chinese economy in 2024

The Chinese economy’s rebound started slowly last spring, shaking off the effects of an estimated 1.41 million excess deaths from the pandemic and China’s zero-COVID policies. Today, although growth will likely meet the government’s 5 percent target for 2023, the Chinese economy remains troubled, plagued by flat private investment, flagging consumer confidence, and high youth unemployment. Falling prices and depressed business and consumer confidence are flashing warning signs about the year ahead.

Here are five big uncertainties about Chinese economic performance and the government’s policy responses that will determine whether growth can be sustained in 2024.

1. Can China avoid a deflationary spiral?

China’s deflation pressures have worsened in recent months. The consumer price index for November recorded its biggest drop in three years. More ominously, the producer price inflation has remained negative for more than a year. While the sharp drop in consumer prices was influenced in part by declining pork prices, core consumer price index (CPI) inflation, which excludes food and energy, was just slightly positive in November, reflecting weak domestic demand. China’s GDP deflator, a measure of overall inflation in an economy, was negative for both the second and the third quarters this year and is likely to be negative for the whole year.

If prices continue to fall, consumers and businesses will likely put off buying and investing in anticipation of further price declines. A deflationary spiral would lead to lower production, falling wages, and rising unemployment. Even now, rising deflationary pressures are pushing up real borrowing costs, adding to the country’s already high debt burden. One estimate suggests that inflation-adjusted real borrowing costs in China have reached their highest levels since 2016. The first big question for China in 2024: Will the government undertake the policy changes necessary to revive growth, and will an increasingly wary and reluctant private sector respond?

2. Will the government tackle the debt-deflation spiral with greater stimulus?

The textbook response to weak aggregate demand and falling prices is stimulus, but the Chinese government acted tentatively in 2023. The People’s Bank of China lowered policy interest rates only moderately this year, perhaps reflecting the belief that further monetary easing will not be effective given weak credit demand. In addition, a weakening currency and worsening capital outflows limited the central bank’s latitude for maneuver.

Shang-Jin Wei of Columbia University suggests that China needs to adopt the “whatever it takes” approach pursued by the European Central Bank a decade ago to halt the debt-deflation spiral into which China is falling. Recent signals coming out of Beijing’s Central Economic Work Conference, however, suggest this approach won’t be taken. This annual gathering of the Chinese leadership sets the tone for economic policy in the new year, and the one being set so far suggests that while monetary policy may be further eased to offset deflation, there will be no large-scale monetary stimulus.

If monetary stimulus is weak, fiscal policy may play a more prominent role in 2024. The Chinese government has long been reluctant to run a headline fiscal deficit larger than 3 percent of GDP. But Beijing’s recent budget adjustment, namely the issuance of an additional RMB 1 trillion in sovereign bonds, the entire proceeds of which will be transferred to local governments, seems to suggest that the authority is rethinking its long-time fiscal conservatism. The Central Economic Work Conference pledged stronger fiscal support in the new year. China’s headline fiscal deficit may rise to 3.5 percent of GDP or higher, and the additional fiscal deficit will likely be entirely financed by the central government issuing treasury bonds.

The second big question for 2024 is how the government will respond to weak growth. Will the Chinese central bank make unexpected moves in the new year? Are we witnessing a major change in how the Chinese government uses fiscal policy? Or will the government remain conservative in its use of monetary and fiscal policy, content that its actions to date will take hold in the coming year?

3. Can private sector confidence be restored?

Low confidence in a sustained recovery was expressed repeatedly by economists, business leaders, and working people during our recent trip to Beijing. Chinese consumer confidence remains at a historic low despite the short-lived improvement in early 2023. Households continue to park savings—which in previous years they would have spent on real estate or other purchases—in more liquid assets like bank deposits. Household bank deposits reached yet another record level of RMB 135 trillion at the end of November, according to the People’s Bank of China. In the meantime, confidence among private entrepreneurs remains muted following intense regulatory campaigns and crackdowns. Business fixed-asset investment remains weak. Private investment, dragged down by shrinking property development investment, in year-over-year terms has contracted for more than six months.

Low confidence is a symptom of, as Adam Posen calls it, the “economic long COVID” that has plagued the Chinese economy since its reopening. A major cause of the continuing malaise is the Chinese government’s arbitrary intrusion into private sector activity, which culminated in its extreme response to the pandemic. As a result, households and companies have become less responsive to economic stimulus. Several support measures in the housing sector in 2023 have done little to restore confidence or increase sales. As one of us warned earlier this year, private sector activity in China is unlikely to strengthen without curtailment of the role of the government in economic affairs. The third big question for 2024 is whether the private sector will respond to government pronouncements or whether renewed confidence and investment will only flow from bolder policy moves.

4. Can the government stem the property downturn?

The property downturn continues to drag on consumer and business confidence and, thus, Chinese growth. Despite the many measures that the government introduced this year to revive housing demand, real estate sales have barely picked up. With sluggish sales, real estate developers continue to struggle with their liquidity crises. Perhaps in response, the government’s real estate policy recently shifted from supporting demand toward supporting developer financing. The authorities have asked major state-owned banks to provide more loans to property developers, especially private ones, even for some lacking adequate collateral.

This is not the first time that Chinese state banks have been asked to provide greater support to developers. In the past the banks have resisted the government’s push because of their desire to avoid a sharp rise in bad loans and shrinking profit margins. Will this time be different? The government could further leverage its political influence and exercise greater intervention in banks’ lending decisions this time around, at the risk of further weakening China’s financial stability.

5. Will foreign direct investment into China rebound?

It’s not only domestic investors who suffer from low confidence in China’s economy. China’s balance of payments data show that foreign direct investment (FDI) is exiting China at a record pace. Foreign firms are not only refusing to make new investments, some are also selling existing assets and remitting earnings back to headquarters at scale. There is little evidence that multinationals are withdrawing from China entirely. Most foreign firms are likely selling just part of their investments in China while continuing to maintain a presence in the country.

The Chinese government has taken note, and it has offered more supportive rhetoric and policies to reignite inflows of foreign investment. These efforts confront foreign businesses’ “promise fatigue,” as they remain skeptical that the authority’s supportive rhetoric will actually translate into meaningful policy actions. Other factors that have contributed to the recent collapse in FDI, including worsening geopolitics, are unlikely to reverse course soon. Given these factors, it remains uncertain whether foreign investors will return to China in 2024.