As the head of China's largest jewelry retailer, Kent Wong has his finger on the pulse of consumers in the world's second-largest economy – and they're wary.
Wong, chief executive of Chow Tai Fook, said the chain's customers had switched from diamonds and other gemstones to gold, a store of wealth in difficult times. “In the short term, people will definitely continue to be more cautious [whether it’s] consumption or investment,” he said, adding, however, that he expects consumer confidence to return in a year or two.
Wong's cautious outlook for 2024, shared by many analysts, comes as policymakers in Beijing prepare for a crucial year in their fight to restart the economy and face the threat of debt deflation. to escape the spiral.
The government is expected to announce on Wednesday that gross domestic product grew about 5.2 percent last year, according to a Portal poll of analysts. While that would be slightly above the official target of 5 percent, economists expect 2024 to be more challenging. The same survey forecasts growth will slow to 4.6 percent.
The housing downturn is now in its third year, exports are weak, cautious investors are avoiding China's financial markets and policymakers are battling what Morgan Stanley analysts say is the country's longest deflationary pressure since the 1997-98 Asian financial crisis.
“I think it's a critical year for the Chinese economy in the sense that deflation could enter a vicious cycle,” said Robin Xing, chief China economist at Morgan Stanley.
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Xing said companies had begun reducing debt and foregoing investments and hiring as the labor market tightened and salary expectations worsened. “To break this vicious circle we need some very meaningful policy efforts,” he said.
Analysts expect that the annual meeting of the National People's Congress, the rubber stamp parliament, will again set an economic growth target of around 5 percent when it meets in early March.
Last year's target, while robust compared to developed economies, was China's lowest target in decades. With the economy weakened by tough lockdowns in 2022, this should have been easy to achieve, analysts said, but the government was forced to step up fiscal support after growth stalled mid-year.
The base effect of the 2022 comparison likely flattered China's GDP growth by about 2 percentage points last year, said Hui Shan, chief China economist at Goldman Sachs.
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Like last year, the real estate sector represents the biggest uncertainty for the economy in 2024, analysts said. The government has announced several initiatives and recently revealed that the central bank in December funneled RMB 350 billion ($49 billion) to banks through a facility known as “pledged supplementary loans.”
It was not explained what the loans were intended for, but analysts believe they could be earmarked for the “Three Major Projects” – a stimulus program to support the homebuilding industry.
Chris Beddor, deputy director of China research at Gavekal, said this plan could be enough to end stalled construction activity, but real estate sales would be a bigger unknown. As of December, China's property sales in 30 major cities were still only 60 percent of pre-pandemic levels in 2019.
Beddor said if the housing crisis continues to worsen, authorities could be forced to launch a “bazooka” stimulus package that would surprise the market on the upside. However, he added that his base case was more of a stabilization than a recovery. “There will be a fairly modest recovery this year, in other words, at least it won't get any worse,” he said.
Beyond the real estate sector, economists argued that a much broader stimulus package coupled with reforms was urgently needed to restart the economy.
“Deflation is extremely worrying for a country like China, which is accumulating government debt faster than Japan ever has,” said Alicia García-Herrero, chief Asia-Pacific economist at Natixis. During times of deflation, prices and wages fall, but the value of debt does not, increasing the burden of repayment.
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The central government needs to deliver a fiscal package that targets consumption rather than more investment in manufacturing, Morgan Stanley's Xing said. This could benefit the hundreds of millions of migrant workers in China, for example, by providing them with better access to benefits and reducing their incentive to hoard savings rather than spend.
“We need a decisive transition to fiscal easing,” Xing said. “Of course it depends on the size and the speed. If policymakers continue to underachieve, the demand from policymakers to break this debt-deflation trap could ultimately be even greater.”
Economists argued that exports, which shrank in dollar terms last year, could not be relied upon to save the economy given weak global demand. China's stimulus measures, which prioritize expanding state-run banks' lending to manufacturers, have led to overcapacity and increased tensions with trading partners such as the EU.
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Despite market calls for Beijing to ease policy and China's own efforts to present itself as investor-friendly, analysts said policymakers continued to send mixed signals.
The People's Bank of China left a key lending rate unchanged on Monday, even as the market expected a cut. Last month, the government shocked investors by announcing tough draft restrictions on video games, after earlier assuring that the tech crackdown was over.
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The government tried to allay concerns by firing the official in charge of the draft rules, but analysts said the damage was done.
All of this would make it ambitious to hit a 5 percent GDP growth target this year, economists said. Goldman's Shan said the government needs to ease pressure on the real estate sector, implement more expansionary fiscal measures and “get lucky on exports.”
“If the government really wants it, they will find a way to get to 5 percent one way or another. But it will be a difficult task,” Shan said.