The shortened version was published by the South China Morning Post: https://www.scmp.com/comment/opinion/article/3246778/china-steer-steady-economy-amid-structural-and-geopolitical-challenges
As the global economic landscape continues to evolve, China's strategic positioning for 2024 unveils a multifaceted approach aimed at stabilizing and enhancing its economic structure. This article provides a balanced examination of China’s anticipated economic directives and their implications for the Chinese stock market, the real estate sector, and the broader economy.
Fostering Strategic Industries through Proactive Fiscal and Structural Monetary Policies
China's 2024 economic blueprint is heavily predicated on the implementation of proactive fiscal policies designed to catalyze the growth of strategic technological sectors. This initiative is not merely a financial maneuver but a deliberate stratagem to pivot towards high-quality development and a uniquely Chinese modernization in the broad context of great power competition. The state's intervention in funding national strategic high-tech initiatives is a testament to its commitment to technological self-reliance.
In the fields of clean energy and low-carbon development, the implementation and improvement of environmental taxation policies and government green procurement will be pursued in order to accomplish the goal of “having carbon emissions peak before 2030 and achieving carbon neutrality before 2060.”
Favorable fiscal policies will support innovation in particular, with additional deductions for research and development expenses, tax reductions for key industries, and personal tax benefits for the conversion of scientific and technological achievements. Advanced manufacturing will see tax incentive policies directly linked to investment, which include additional deductions for value-added tax in advanced manufacturing, value-added tax credit refunds, and accelerated depreciation of fixed assets.
China's monetary policy for 2024 is set to leverage structural monetary tools to bolster the burgeoning digital economy, which now represents a substantial portion of the national economy. The People's Bank of China is poised to guide financial institutions in directing credit towards specific industries, thereby reducing financing costs and stimulating growth in pivotal sectors such as tech innovation, advanced manufacturing, and green development.
However, the gestation period for the fruition of these policies is a labyrinth of complexities, with success contingent upon a myriad of variables that extend beyond the immediacy of policy implementation. For example, even if all policies are fully implemented, technological breakthroughs generally require a lengthy process and cannot be achieved in the short term (i.e., 1 or 2 years). From the perspective of international competition, some industries in China will continue to be “choked” by foreign countries/companies.
Stock Market Dynamics
Overall, the stock market in 2024 is expected to face ongoing liquidity challenges, affecting stocks and broader societal issues like local debt and real estate. Some portfolio managers told me that with four years of recovery efforts (“疤痕修复”), the market in China bets on the future, hinting at a moderate uptick (“中度上翘“) in 2024. However, until the liquidity issue is fundamentally resolved, I think the stock market will continue to struggle, with at best small rebounds brought about by government stabilization efforts.
The Science and Technology Innovation Board (STAR Market) is worthy of investors’ close attention because it might present some good investment opportunities. It is leveraging domestic and international resources to promote dual circulation and attract international investors, focusing on 'hard technology.' Policymakers will continue to seek new growth drivers in areas like semiconductors, pharmaceuticals, ESG, new energy, and high-end manufacturing, which are likely to attract substantial investment. Moreover, the current valuation of the STAR Market is already at a historically low level. In 2024, it is expected to become one of the highlights and probably lead a rebound.
Yet, external factors such as international geopolitics (e.g., great power rivalry) and U.S. monetary policies (i.e., fed rates are likely to stay longer and higher than many are currently expecting) will impact the stock market performance, with notable fluctuations likely.
The Real Estate Sector: A Balanced Approach
The real estate sector, a significant pillar of China's economy, is poised for a period of cautious recalibration. Balancing economic stability, employment preservation, and the prevention of speculative bubbles will continue to be a delicate task for Beijing.
Currently, there is widespread concern about the real estate market, particularly the declining housing prices in nearly all of the 70 major cities monitored by the National Bureau of Statistics. Restoring confidence will be challenging. However, Beijing's top leadership is fully aware of the situation and may introduce more favorable policies in 2024.
China will continue to implement city-specific policies, enhance the people-oriented nature of real estate, and increase financial support for the construction of affordable housing. Notably, a policy document from the People's Bank of China on December 27th mentioned, “Equally satisfy the reasonable financial needs of different ownership types in the real estate (一视同仁满足不同所有制房地产行业合理金融需求)”. This statement is crucial. It emphasizes treating state-owned and private enterprises impartially. Theoretically, this is a very positive signal for many real estate private enterprises with financing needs. The term "reasonable" has two main implications: one is the continued support for the financing needs of real estate companies, hoping to see relief for some enterprises next year. The other aspect is that policymakers aim to curb the real estate sector's excessive consumption of financial resources, preventing too much financial flow into the industry, reflecting the central government's strategy of "supporting without over-promoting" (“托而不举”).
We have paid particular attention to the real estate situation in first-tier cities. In these cities, except for Guangzhou, the other three have not significantly eased purchase restrictions. This is mainly because Guangzhou witnessed the highest housing price drop (-10.95% yoy) among them.
The relaxation of purchase restrictions is one of the most impactful policy measures in first-tier cities. Unlike other policies that have previously accelerated the entry of homebuyers into the market, the role of purchase restrictions primarily lies in expanding the demand. Therefore, any relaxation will be introduced with caution. It is expected that this measure will be decided upon based on market conditions and in conjunction with changes in the market in the first quarter of 2024. Even with the relaxation of purchase restrictions, it is expected to be cautious and likely to start with a moderate opening in peripheral areas.
Land and housing prices are expected to rebound in some core areas of first-tier and second-tier cities, but the increase will be limited, and significant fluctuations are unlikely in 2024.
Overall Economic Trajectory
China’s economy in 2024 faces a complex mix of structural transformations, consumer confidence issues, and international tensions. The government's plans to foster a unified market, bolster domestic demand, and promote investment and foreign trade is a clear indicator of its strategic foresight. Again, systemic collapse is considered extremely unlikely.
However, the journey is fraught with challenges, and China will be lucky to achieve a 4.5% GDP growth rate next year (note: the World Bank and the IMF’s projections for China’s 2024 GDP growth rate are 4.5% and 4.6%, respectively).
As we peer into the economic horizon of 2024, China's strategy reveals a tapestry of ambitious initiatives interwoven with cautious pragmatism. The country's economic blueprint is a sophisticated amalgam of policies and reforms designed to support political and economic stability and technological growth. However, the path is laden with uncertainties, from the efficacy of policy measures to the unpredictable currents of global dynamics next year. For policymakers, investors, and observers alike, understanding the nuances and implications of China's economic strategies and policies will be paramount in navigating the complexities of an increasingly interconnected world. As China continues to chart its course, the global community watches with bated breath, anticipating the reverberations of its economic decisions on the international stage.