Can China get its economic miracle back on track in 2024?

China's disappointing post-Covid recovery has raised significant doubts about the foundations of its decades of spectacular growth and presented Beijing with a stark choice for 2024 and beyond: borrow more or Grow less.

 

Expectations were that once China lifted its strict COVID rules, consumers would again burst into malls, foreign investment would resume, factories would reopen and land auctions and home sales would resume. Stability will come.

 

Instead, Chinese buyers are saving for rainy days, foreign firms have pulled out, manufacturers are facing a drop in demand from the West, local governments' finances have sunk, and property developers have defaulted.

The skewed expectations have partly vindicated those who have always doubted China's growth model, with some economists even drawing parallels with Japan's pre-bubble "lost decades" of stagnation starting in the 1990s. Also pulled.

 

China skeptics say Beijing failed to shift the economy from construction-based growth to consumption-based growth a decade ago, when it should have done so. Since then, debt has overtaken the economy, reaching levels that local governments and real estate firms are now struggling to service.

China's policymakers vowed this year to boost consumption and reduce the economy's reliance on property. Beijing is guiding banks to shift more lending away from real estate to advanced manufacturing.

 

But a concrete long-term roadmap to clean up debt and restructure the economy remains elusive.

Whatever choice China makes, it will have to account for an aging and shrinking population, and a difficult geopolitical environment as the West grows wary of doing business with the world's No. 2 economy.

 

Why is this Important?

China is likely to grow by 5% or more in 2023, outpacing the global economy. However, under that headline is the fact that China invests more than 40% of its output – double that of the US – suggesting that a significant portion of it is unproductive.

 

This means that many Chinese do not notice this development. Youth unemployment hit 21 percent in June, the last set of data before China halted controversial reporting.

 

University graduates who had studied for advanced economy jobs are now working in low-skilled positions to take a pay cut.

 

In an economy where 70% of household wealth is held in real estate, homeowners are feeling poorer. Even in one of the economy's few bright spots, the electric vehicle sector, the price war is causing pain for suppliers and workers.

 

An employee measures a newly manufactured ball mill machine at a factory in Nantong, Jiangsu Province, China, on June 28, 2019.

Analysts say national disillusionment could expose President Xi Jinping to threats to social stability. If China slips into a Japan-style decline, it will do so before achieving Japan-style growth.

 

This will be widely felt as most global industries rely significantly on suppliers in China. Africa and Latin America depend on China to buy their goods and finance their industrialization.

 

What does this mean for 2024?

China's current problems give it little time before it has to make some tough choices.

 

Policymakers are eager to change the structure of the economy, but reform in China has always been difficult.

 

A push to boost the welfare of millions of rural migrant workers, who - according to some estimates - could add 1.7% of GDP in household consumption if they had access to public services like urban residents, social stability. are already on hold due to concerns about and expenses.

 

China's efforts to address its property and debt problems also come up against similar concerns.

 

Who pays for their bad investments? Banks, government firms, central government, businesses or households?

 

Economists say either of these options could mean weaker future growth.

 

For now, however, China seems reluctant to make choices that sacrifice growth for reform.

 

Now government advisers are calling for a growth target of around 5 percent for next year.

 

While that's in line with its 2023 target, it won't compare year-on-year with the disruption caused by the lockdown in 2022.

 

Such a target could push it into more debt — the kind of fiscal easing that prompted Moody's to cut China's credit rating outlook to negative this month, pushing Chinese stocks to five-year lows.

 

Where that money is spent will tell us whether Beijing is changing its approach or doubling down on the growth model many fear is heading its way.

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