China’s growth improvement

ANZ Research has lifted its growth forecast for China in the wake of better-than-expected gross domestic product (GDP) figures from the Asian giant.

China reported 4.2 per cent nominal and 5.3 per cent real growth in the first quarter of calendar 2024, the latter higher than ANZ Research’s early forecast of 4.6 per cent.

As a result, ANZ Research has revised its China full-year GDP forecast for 2024 and 2025 to 4.9 per cent and 4.5 per cent, respectively. The trajectory, however, remains downward.

ANZ Research continues to see a two-speed economy in China, with exports outperforming in the first half of 2024 and domestic demand staying weak throughout the year.

Expect the People’s Bank of China (PBoC) to cut interest rates by 10 basis points (down from a previous forecast of 20) as growth momentum picks up and the exchange rate remains a cause for concern.

External recovery

China’s seasonally adjusted quarter-on-quarter GDP rose to 1.6 per cent from 1.2 per cent in the fourth quarter of 2023, suggesting a significant increase in growth momentum. The recovery in external demand explains the improvement in growth.

China’s export value increased 4.9 per cent during the quarter, year on year, in yuan. The export price dropped about 8 per cent, while the implied export quantum surged 13 per cent in the period. ANZ Research estimates net exports contributed 1 percentage point to first-quarter GDP growth (compared to 0.6 percentage points in 2023).

The 7.5 per cent fall in export value in March 2024 was mainly due to the high base last year and the ‘workday effect’.  In March 2023, a spike in demand following the Lunar New Year holiday resulted in a 10.9 per cent rise in shipments.

In addition, March 2024 had 21 working days, two days fewer than March 2023. The daily average export should grow 1.3 per cent, year-on-year, after the workday adjustment.

In the near term, China’s growth momentum will rely on external demand. The semiconductor cycle is recovering. ANZ Research’s preferred leading indicator for North Asian exports – the share price of Apple Inc – suggests China’s exports will rebound to 10 per cent in the next few months.

Even so, it is likely the improvement in external demand will be offset by weakness in domestic demand.

Unchanged

ANZ Research’s view on China’s domestic demand remains unchanged. Property investment and sales fell 9.5 per cent and 27.6 per cent respectively in the first quarter. New home prices fell 2.7 per cent in March 2024. Due to the negative wealth effect, both domestic consumption and investment are likely to underperform moving forward.

ANZ Research estimates the property market will drag Chinese GDP growth by 0.3 percentage points in 2024. Property investment is expected to drop 12 per cent in the full year. In the first three months, new projects dropped 27.8 per cent. This will reduce the number of projects under construction in subsequent months. Property investment activity will reduce further.

Property rental yield being high enough to cover mortgage interest is a sign of the property cycle bottoming out. Currently, the average rental yield in China’s top-tier cities is 1.5 per cent, much lower than the average mortgage rate of 4.0 per cent.

From an investment perspective, a large adjustment of property prices or mortgage rates will be required to bring back home buyers.

Blueprint

Weakness in domestic demand is not consistent with the preference of Chinese policymakers. The economic blueprint of the current leadership is to use ‘domestic circulation’ to at least partially offset ‘external circulation,’ as China wants to promote self-sufficiency.

The year 2024 is significant for policymakers: the People’s Republic of China will celebrate its 75th founding anniversary in October. The third plenum of the 20^th Central Committee will likely be held, but the date is yet to be announced. Policies announced at this meeting tend to be reform-oriented and may not be consistent with the short-term policy narrative.

Against this backdrop, authorities will likely increase policy support in the second and third quarters in a bid to cement 5 per cent GDP growth. A significant change in policy tone at the first-quarter Monetary Policy Committee meeting was the removal of ‘cross-cyclical adjustment’. All eyes will be on April’s Politburo meeting for any further stimulus.

China will rely on fiscal policy going forward. The timing of US interest rate cuts remains uncertain and capital outflow pressure is still strong. Concerns around exchange rates will constrain the intensity of monetary policy. As a result, ANZ Research has lowered its rate cut call to 10 basis points in 2024.

To offset the government bond supply peak in the coming months, the PBoC is expected to inject liquidity either through a 50-basis point cut to the required reserves ratio, or proactively buying Treasury bonds on the open market.

Raymond Yeung is Chief Economist, Greater China & Zhaopeng Xing is Senior China Strategist at ANZ

This is an edited excerpt of the ANZ Research note, “China: GDP forecast upgraded, trajectory unchanged”, published April 16, 2024