Comprehensive approach key to ensuring balanced growth

China's economic tapestry this year has been complex, revealing both challenges and opportunities.

The domestic economy has exhibited a "diversified and weak recovery" in 2023 and the nation's GDP growth rate is expected to reach 5.3 percent for the whole year.

While GDP growth consistently improved in the first three quarters, the predicted two-year average growth of 4.1 percent is notably lower than the pre-COVID-19 levels, indicating a significant gap in demand despite the ongoing economic recovery.

The divergence between GDP and price growth has also been unusual, highlighting insufficient overall demand during the recovery.

When we calculate quarterly GDP, the continued uptrend in quarterly GDP corresponds to a restoration of production.

That is, the restoration on the supply side or production side continued to strengthen, but the consumer price index growth has remained at a low level.

However, new employment drivers continued to emerge despite the weak recovery.

The operation of enterprises and the employment situation have improved to some extent.

In August, September and October, profit growth turned positive and the urban unemployment rate continued to decline.

Sectors like new energy and modern services experienced robust growth, while investments in high-tech industries, which include high-tech manufacturing and services, exceeded 10 percent.

Economic highlights

Notably, there are some highlights in economic operations this year, characterized by fluctuating recovery, deviations from traditional economic recovery patterns, notable economic disparities, and a stark contrast between macroeconomic and microeconomic perceptions.

For example, industries that are in line with the logic of order restoration performed better, while the performance of those that rely more on market forces has been weaker.

Catering and other industries continued to recover, but the performance of the manufacturing industry has been relatively weak.

A large number of private enterprises are concentrated in the lower end of the manufacturing sector, and some private entrepreneurs will think that the economic situation will be more severe, resulting in a slow process of restoring entrepreneurs' confidence.

Several factors contributed to insufficient demand, including a malfunctioning mechanism driving consumption, fundamental changes in the real estate market, and major significant transformations in international trade.

From 1990 to present, international trade has been a global industrial chain based on convenient production, which has led to a large-scale transformation of global industries and major adjustments in the incomes of countries around the world.

As a result, there is now a wave of anti-globalization.

For China, there is a return flow in the industrial chain, and a trend where foreign companies increasingly regard China more as a consumer market rather than a global production base.

Overall, the current lack of demand has been caused by both cyclical and structural problems, and more importantly, structural changes, because China is in a transition period of economic development. Thus, recovery will be slow and not happen overnight.

China is poised for a shift in economic dynamics in 2024. First, there will be a further upswing in the economy from a reversal of cyclical forces and a further acceleration in structural forces.

Second, the economy has entered a phase of new equilibrium. Though it will be difficult to return to the growth rates seen before the pandemic, various industries are expected to enter a balanced growth phase and companies' confidence about an economic recovery will greatly improve.

An important reason for this is that the period of structural adjustment will be accelerated after a reversal of cyclical forces, which will lead to a recovery in confidence.

The recovery in corporate profitability has boosted balance sheet repair.

Judging from their performance during August, September and October, companies' current positive year-on-year profits can be sustainable. Behind this is an overall improvement in volume, price and profitability, and this trend will likely continue in the future.

Employment and incomes have also stabilized. The structural adjustment of households' balance sheets may have bottomed out, which will offer certain support for consumption recovery next year.

In addition, the structural adjustment range of the real estate sector has exceeded the normal levels of the market. With major policy efforts from the government and a partial correction, the decline in real estate investment in 2024 is expected to narrow sharply.

Last, but not least, as the order of international exchanges is restored and the Belt and Road Initiative continues to advance, export growth is expected to return to normal levels next year.

On the structural side, China has paid special attention to new engines of growth.

In recent years, the country has driven the large-scale commercialization of 5G. Unlike 4G, 5G investment does not seem to have many consumer application scenarios. In fact, 5G is more targeted at the industrial end.

Artificial intelligence is also likely to trigger 5G application scenarios, providing a driving force for the early construction of large-scale digital infrastructure.

At the same time, data elements will enter into asset calculations next year, which will further drive momentum for enterprises.

Considering these factors, the outlook for China's economy in 2024 is positive, with growth rates expected to approach pre-pandemic levels. Both supply and demand sides are expected to continue recovering, gradually reaching a state of balance, accompanied by moderate price growth.

Risk factors

However, there are still risks that demand attention.

Interest rate differentials domestically and internationally could impact financial markets. Liquidity risks in the real estate sector remain a concern, and there is a need to address structural issues in local government debt.

The structural and regional problems of local government debt are prominent, and the behavioral patterns of local governments are mismatched with the current economic dynamics.

Local governments are determined to fight for the economy, but their methods are rushed. For example, in an era of digital economy, R&D has already entered a mode of rapid search, finalization, and iteration.

However, the model of local governments is based on traditional, large-scale cost reduction and scale improvement, which do not match the current economic dynamics.

Our suggestions for policy adjustments are as follows. Regarding policy objectives, I suggest setting the GDP growth target for 2024 at 5 percent. A multi-year decline in demand will drag down the economy's potential output. Therefore, we must quickly fill those gaps.

We should also balance the economic and social development of 2024 and 2025 well in the 14th Five-Year Plan (2021-25) period.

Detailed recommendations include prioritizing market-oriented reforms, emphasizing short-term countercyclical policies, and maintaining overall macroeconomic stability.

Reform efforts should focus on capital markets and fiscal policies. Countercyclical policies should prioritize employment, implement proactive fiscal measures, optimize spending intensity and structure, and explore further monetary policy adjustments.

Structural policies should be geared toward cost reduction and improving economic efficiency, seizing opportunities like the integration of data assets to repair balance sheets and boost the role of the digital economy.

In the real estate sector, there is a need for balanced policy support. While short-term measures can stabilize the market, the extended focus should be on guiding the industry through a transformation. Relaxing restrictions on real estate in the short term may be considered, to align with current market dynamics.

In short, a comprehensive and coordinated approach, combining short-term stimulus with long-term structural reforms, is essential to ensure sustainable and balanced economic growth next year.

The article is a translation of a recent report of the China Macroeconomy Forum, a think tank in Beijing.

The views do not necessarily reflect those of China Daily.