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Issue Brief February 5, 2024

China Pathfinder update: Lack of policy solutions in second half of 2023 belies official data

By GeoEconomics Center and Rhodium Group

Through the second half of 2023, the gap between China’s impressive official data and visibly underwhelming consumer demand, unresolved local government debt problems, and an unprecedented drop in foreign direct investment was stark. The China Pathfinder framework scans for evidence of market policy reorientation to fix these problems. But in this coverage period (July through December 2023), Beijing’s response was limited. Officials redoubled efforts and incentives to encourage foreign investment and trade, pledged to loosen cross-border data transfer rules, and increased deficit spending limits to stoke anemic demand. Beijing also simultaneously threatened economists with consequences for even talking about bearish signals and discontinued unflattering economic data, severely aggravating credibility concerns. Policymakers did next to nothing to tackle the real structural problems. Though we expect the severity of 2022–23 declines to set China up for a modest cyclical rebound in 2024, long-term growth potential will disappoint until fundamentals are addressed.

Here are five things to watch for in 2024:

  1. In the quarters to come, property will shift from a massive drag to a modest boost to GDP growth—though from a much lower base.
  2. There is a reasonable likelihood that policymakers will try to use this breathing room to get more reforms on track, rather than defer them further as in recent years.
  3. While cyclical conditions will stabilize this year, Beijing must soon acknowledge that slower growth, in the 3 percent or 4 percent range, is here to stay. This may lead to more modest geoeconomic ambitions, but will also bring spillovers to trading partners due to lower domestic demand.
  4. China will continue to face weak exchange rate conditions, and capital outflows are expected to continue.
  5. Beijing’s capacity to influence growth via government spending will remain constrained by local fiscal stress and an already burdened monetary policy.

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Image: Chinese President Xi Jinping is seen on a screen during a video address for the Global Trade in Services Summit, at the media centre for China International Fair for Trade in Services (CIFTIS) in Beijing, China September 2, 2023. REUTERS/Florence Lo