Key takeaways

  • Growth-friendly policies will continue in 2024, but large-scale stimulus is unlikely.
  • The housing market correction will likely endure, as both demand and supply-side challenges persist. Public housing is important to mitigate the housing drag.
  • Deflation will end in 2024, but low inflation will stay.

Reopening was the biggest catalyst for China’s economic recovery in 2023, but the path was bumpy. What are the key questions about China’s economy in 2024?

1. How will China’s government tackle economic growth in 2024?

For full-year 2023, real GDP grew 5.2% year-over-year, modestly higher than the official growth target of “around 5%,” while nominal GDP growth moderated on deeper deflation pressure.

“Fiscal and monetary policy will better coordinate with each other in 2024 and fiscal policy will truly become accommodative. We expect a shift from less transparent off-budgetary items to a more transparent budgetary fiscal deficit, which is a positive change.”

In 2024, the growth target stays unchanged at around 5% and growth-friendly policy is set to continue, but large-scale stimulus is unlikely. Policymakers and investors have a number of differing views on the current economic situation:

•  Markets generally view the post-reopening recovery in 2023 as “weaker than expected,” while the government interprets the economic outcome as achieving its target.

•  Secondly, policymakers and investors use different benchmarks when assessing the appropriate magnitude of policy easing.

•  The government and market participants also have differing priorities when it comes to policy objectives. Policymakers focus on both macro targets (growth, inflation, unemployment) and structural transformation, such as social and security objectives, meaning the government’s tolerance for issues such as the housing market correction is higher than the market expected.

•  Further policy stimulus is also an area of divergence. Some investors and renowned policy advisors have argued that China should shift to a “whatever it takes” strategy. Policymakers think differently, however, and are cautious about the limited room for fiscal and monetary stimulus.

•  Finally, investors and policymakers disagree on policy transmission channels. China’s policy response will likely prioritize the supply side, particularly for supporting manufacturing upgrades and green technologies. In contrast, investors have argued that demand-side policy support is more effective when dealing with deflation pressures. 

What will happen in 2024? J.P. Morgan Research’s interpretation is the official fiscal deficit will increase to 4.2% of GDP (including 3.0% in the 2024 fiscal budget, 1 trillion yuan special central government bond and 500 billion yuan carry-over from 2023), while the aggregate fiscal deficit in the fiscal budget will increase from 6.4% of GDP in 2023 to 7.0% in 2024. Meanwhile, augmented fiscal deficit will be marginally higher at 12.2% of GDP in 2024, (12.0% in 2023) as off-budgetary items tend to be contractionary.

“Fiscal and monetary policy will better coordinate with each other in 2024 and fiscal policy will truly become accommodative. We expect a shift from less transparent off-budgetary items to a more transparent budgetary fiscal deficit, which is a positive change. The Central government will also likely increase its fiscal deficit to partially mitigate fiscal difficulties by local governments,” said Haibin Zhu, Chief China Economist and Head of Greater China Economic Research at J.P. Morgan.

“We also expect fiscal support will continue to prioritize investment, especially infrastructure investment for new economy sectors and R&D for manufacturing upgrades,” Zhu added.

2. Will the housing market stabilize in 2024?

China's housing market continued to decline in 2023 and has entered an overshooting stage. In 2023, new home sales fell 17.3% (after a 26.8% decline in 2022), new home starts fell 21.4% (after a 40% decline in 2022) and real estate investment fell 9.6% (vs. -10% in 2022).

The only housing activity indicator that registered positive growth was new home completion, which rose 15.8% in 2023 (vs. -14.3% in 2022). Meanwhile, new home prices stabilized in the first half of 2023 but started to decline again later in the year, falling 2% in the second half of 2023. 

China’s housing market in numbers

“The dramatic fall in new home sales and new home starts has taken them below our estimates of fundamental volumes to be expected over the long term and there is no sign of bottoming, despite the latest round of housing policy relaxation since August,” Zhu said.

The challenges in the housing market come from both the demand and supply side. On the demand side, changes in demographic factors (new household formation, birth rate), urbanization, home ownership and purpose for home purchases all suggest that new home demand has been and will continue to be on a downward trend, with home upgrade demand steadily replacing new home demand. 

Demand is also softer in the near term because of weaker expectations on income and home prices, along with concerns about home delivery. On the supply side, funding difficulties for private real estate developers remain a major obstacle and the high volume of homes under construction will take multiple years to return to a normal level. 

“In such an overshooting environment, it will take excessive rather than ‘just enough’ policy responses to stabilize housing activity and market expectations. Policymakers are not prepared for such a dramatic policy shift. Hence, we expect housing market activity to continue to decline in 2024. In other words, the probability of the housing market bottoming in 2024 is relatively low,” Zhu said.

The housing market will continue to weigh on economic growth, as real estate investment as a percentage of GDP has fallen from the peak of 13.9% in 2020 to an estimated 9.6%.

Public housing is important in macro-stabilization efforts. There is massive demand for public housing and rental housing in the new urbanization process, but the major constraint of public housing development is a lack of funding.

J.P. Morgan’s baseline scenario assumes a 1 trillion yuan ($139 billion) package partly funded by the People’s Bank of China (PBOC) to support the so-called “three major projects” including public housing. It is equivalent to 9% of total real estate investment in 2023 and could reduce the decline of real estate investment in 2024 from 8–10% to 2–4%.

Longer term, the funding support for public housing could come from rural land reform. In the current two-tier land system in China, urban land is owned by the state and housing is a commodity through land sales by the government and construction by developers.

“The importance of rural land reform, if implemented, can be compared to the housing market reform in late 1990s,” Zhu said.

3. Will deflation end in 2024? 

Deflation is expected to end in 2024, but low inflation will likely remain throughout the year ahead. China is an outlier when it comes to inflation dynamics. Instead of the common inflation challenges experienced by other countries after reopening, China has been facing intensified deflationary pressures. In March 2024, China’s headline Consumer Price Index (CPI) inched up 0.1% compared with the previous year and its PPI (Producer Price Index) was down 2.8%.

China’s PPI vs. global commodity price index

Line chart showing a deflationary slump in PPI and the global commodity index from 2021 highs. China’s PPI is expected to climb out of deflation by mid-2024.

Deflation is a result of various factors. On the external front, global commodity prices were in a deflationary cycle after China’s reopening, falling 4.7% year-over-year in 1Q24. Domestically, food prices were down 3.2% on average in 1Q (vs. +3.7% in 1Q 2023), mainly due to pork and vegetable price declines.

China’s PPI deflation likely will be more prolonged than expected, with the full-year average at around -1.6% (vs. -3.0% in 2023). The energy price component in the CPI will no longer be a drag and as pork supply has stabilized, prices are expected to bottom near current low levels. As the pork price drag eases, headline CPI should stay positive for the rest of 2024.

“We expect deflation will end in 2024, as global commodity prices will likely move higher. However, the low inflation environment will continue into 2024. Our forecast of average CPI in 2024 is 0.5%, still much lower than the long-term average of 2%.”

“We expect deflation will end in 2024, as global commodity prices will likely move higher. However, the low inflation environment will continue into 2024. Our forecast of average CPI in 2024 is 0.5%, still much lower than the long-term average of 2%,” Zhu said.

“Our 2024 inflation outlook has two important implications. First, with prolonged deflation, China’s nominal GDP growth likely will be lower than real GDP growth in the coming two quarters. Second, the passthrough from improved real activities to corporate earnings upgrade will still take time,”  Zhu added.

4. What will drive consumption?

Consumption performance has been volatile since the pandemic. In pre-pandemic years (2018–19), consumption contributed an average of 61% to GDP growth. This contribution turned negative in 2020 for the first and only time on record, before rebounding and then falling again, in line with COVID restrictions.

After reopening, consumption was a primary growth driver in 2023, contributing 82% to GDP (or 4.3 percentage points) growth in 2023. Nonetheless, the four-year average contribution of 2.5 percentage points is much lower than in pre-pandemic years.

A key component for consumption is retail sales, which registered negative growth in 2020 and 2022. The average cumulative annual growth of retail sales in 2020–23 was only 3.7% (or 2.2% in real terms), much lower than the average growth in 2018–19 (8.4% in nominal terms and 6.4% in real terms). This downshift in consumption has weighed on China’s economic recovery.

Retail sales and consumption contribution to China’s GDP growth

Line and bar chart depicting how retail sales in China registered negative growth in 2020 and 2022.

A National Bureau of Statistics of China survey showed consumer confidence, including income expectations and employment expectations, collapsed in 2022 (after the Shanghai lockdown), but it has continued to stay at low levels even after China’s reopening in 2023.

What will determine the consumption outlook in 2024? J.P. Morgan’s baseline forecast looks for a 6% increase in consumption (in real terms), of which 5% will come from income growth and 1% from the adjustment of household saving rates to pre-pandemic levels.

The risk may be biased to the downside as income growth could come in weaker than official statistics and weak profit growth in the corporate sector in 2023 may point to a delayed/weak improvement in labor market conditions. Also, there is no signal that consumer confidence will improve soon, especially among upper-middle income households.

“Our baseline forecast does not assume any meaningful consumption stimulus measures in 2024, as we have observed in the past several years. The potentially highly effective policy option, i.e. a consumption voucher or e-CNY payout, has a very low probability of being adopted. But we should not rule out the possibility of other consumption support measures,” Zhu said. 

5. Will China’s role in global supply chains change? 

The shifting geopolitical and economic landscape has played a major role in the relocation of global supply chains. How will this affect China’s supply chain, and how will it impact globalization dynamics?

Over four decades of fast growth, China has become a global manufacturing hub. In 2022, it accounted for 18% of global GDP (vs. 2.7% in 1980), 15% of global merchandise goods exports, and 30% of global manufacturing value-added. Looking ahead, China will remain an important hub but its dominant role will likely weaken.

Supply chain relocation out of China is not a new story. It has been driven by a few important structural trends, including increasing production costs in China. Rising wage costs in the last decade have resulted in a declining share of low value-added products. At the same time, China has moved up in the value-added chain, gaining export share in higher value-added sectors, such as electronic products and machinery equipment. 

“Overall, China’s role as a global manufacturing hub will weaken, but global supply chain relocation cannot happen overnight. The process will take time and China will remain an important manufacturer as well as a major market.”

Along with production costs, the shift in the U.S.–China trade relationship since 2018 — which later expanded into technology restrictions and a move in global supply chains from a “just-in-time” to “just-in-case” model in recent years — has also been a key factor in supply chain relocation.

“Overall, China’s role as a global manufacturing hub will weaken, but global supply chain relocation cannot happen overnight. The process will take time and China will remain an important manufacturer as well as a major market,” Zhu said.

“De-globalization is not yet a reality, but traditional trading patterns are being disrupted and new trade corridors are emerging. Emerging Asia is benefiting the most from shifts in global value chains,” Zhu added. 

This article was originally published on February 26, 2024.

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