Need 5% GDP Growth To Create 12 Millions Jobs
In the beginning of 2024, the Chinese state government announced that they were targeting around a 5% annual GDP growth this year against the 5.2% growth result in 2023. Within the government working report published in March, new employment of 12 million would be needed for the new working force in 2024 and they believed every 1% GDP growth would generate more than 2 million new job vacancies. The state planners also launched their plot plan for achieving this goal by focusing on 5 key points: increasing the speed of w Quality Productive Forces development, expansion of Domestic Demands, stimulating the Vitality of Various Business Entities, Promoting High-level of Opening UP for attracting both investment from overseas and overseas market explorations at the same time, and promoting Green and Low Carbon development.
Reach Home in H1 But Difficult To Maintain For H2
An encouraging result of 5.3% GDP Growth was achieved in Q1 2024. Though the authorities announced that the 5% target was maintained in H1, the growth dynamic seemed to be damping down as GDP only grew 4.7% in Q2 Y-O-Y, lower than market expectations. The latest economic indicators such as Value-Added Industrial Output growth for August was only 4.5% (lower than 4.8% from market expectation) which is now 4 consecutive months of slowing down. Similarly, consumption and retail annual growth also ill performed when compared to market expectations. Various financial institutes and bankers have already tuned down their annual GDP Growth forecast now ranging from 4.6 to 4.7% instead of 5%.
Consumption, Investment, Net Export and Government
Fixed Assets Investment, Consumption and Export (3 key drivers of GDP growth) and various boosting policies were all launched to help escalate growth. However, the result of these stimulations did not contribute to the current results as much as in the past.
Real Estate has been a very strong weight factor for Chinese GDP in the past but there was more than a 10.1% dip in H1 (New Built Sale-able Area decreased 19% and Sales Volume dropped by 25%). Overall lowering of real estate values has a double impact on GDP performance as 80% of a Chinese family’s wealth has a direct relationship with real estate investment/holdings, so as real estate values decrease so too does the desire for household consumption. In June, real estate recorded a 4.5% monthly devaluation (highest drop rate since 2015) and retail sales volume only had a 2% increase within the same period. Some economists claim a co-relationship between these two indicators.
Export performed reasonably well: 12 Trillion CNY/$1.7 Trillion within H1 with a 3.7% growth. This export trend continued to Q3: 8.7% monthly growth was noted in August and 4.6% annual growth rate was achieved for Jun-Aug 2024. However, this better-than-expected performance has potential threats to future growth. The high figures are partly due to advance stocking of goods by buyers (especially US buyers who have worries on a possible change to import tariff policies following the upcoming president election in November). The advance purchase of stock goods will affect new order scheduling in the pipeline: as the excess stock will need to be digested, slowing the stock replacement progress which would ripple along supply chains. In addition, headwinds were expected in Exporting as markets still had concerns on the worldwide economic outlook and heightened geopolitical risk.
Domestic Consumption continued to be the problem child of the state planner as people were reluctant to spend and instead put the money in the bank to increase their rainy-day funds. This is reflected by the figures of M1 and M2 Money Supply within the country. M1 reached the highest point in Jun 2023 at 69.6 Trillions CNY/9.8 Trillions $ and turned downward to 63 Trillions CNY/$8.9 Trillions in Aug 2024 (8% down Y-O-Y). On the contrary, M2 crossed the 300 Trillion mark in March and further ramped up to 305 Trillion in August 2024 (an approx. 6% growth p.a.). This large gap and opposing trends of M1 and M2 indicate both civilians and enterprises would rather put their capital into savings rather than investing into production or other economic activities. The growth divergence of M1 and M2, created market concerns on a liquidity trap and the economy losing its’ momentum of continued growth.
Government Expenditures were usually the wildcard in the government's sleeve for jacking up the GDP total. However, the state ministry has just mentioned that the Chinese government had 70 Trillion CNY debits by the end of 2023 under various titles (from state to municipals level), which was more than 50% of 2023 GDP (126Trillion CNY). These debits were just the officially booked value and did not include numerous hidden debits such as off-book values of local government financing of vehicles. The Government could hardly invest in mega projects as almost all the local governments were in the red. Combining this with other negative factors, bankers and institutes now have a pessimistic view of the possibility of achieving a 5% GDP growth target this year.
High Time for revisiting GDP Growth Strategy
As mentioned in the beginning, Chinese planners are facing substantial pressure for new job creation, due in part to demographic reasons as more than 10 million new workers enter the work force each year and need jobs; therein a high annual GDP growth target was the foundation of the plan. However, the sustainability of this tactic has become questionable over time. This might have been easier when China was still in a developing country with lots of potentials for economic growth. But as the country has become the second largest developed economy in the world, the law of marginal diminishing returns may be kicking in: as a lot of effort and resources are required to keep the pace of desired GDP growth. Comparing the Chinese GDP growth target with data consolidated from OECD (Organization for Economic Cooperation and Development), some inspirations might be found. The 38 member countries of OECD, representing the top tiers of developed market economies in the world and having a combined population of 1,400million (the same magnitude of China); have a consolidated average GDP growth ranging between 1.6 to 2.7% (except 2020 & 2021 impacted by Covid-19) within last 10 years.
With China being one of the key partners for OECD, it would not be surprising for China’s long term economic situation to more similarly reflect OECD members’ average GDP growth rather than continue as an outlier. Maybe China can still find a temporary solution to maintain a 4 to 5% (or even 6%) GDP growth in the coming years but they need to develop a new mindset and survival kit to help adapt to a relatively low GDP growth sooner or later.
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