(Ξένη δημοσίευση)-ΑΝΑΚΟΙΝΩΣΗ ΤΥΠΟΥ-EUROBANK-23-12-2024: GLOBAL & REGIONAL FOCUS NOTES | China: At the Crossroads
ΑΝΑΚΟΙΝΩΣΕΙΣ ΤΥΠΟΥ / Δευτέρα 23 Δεκεμβρίου 2024, 13:21 / Πηγή: EUROBANK
*
Author:
Maria Kasola
Research Economist
mkasola@eurobank.gr
ISSN: 2241-4851
23 December 2024
GLOBAL & REGIONAL FOCUS NOTES
China: “At the Crossroads”
An assessment of the current economic situation and the challenges lying ahead
• Over the past 75 years, China’s economy has undergone a profound transformation,
often hailed as an economic miracle
• This remarkable growth has slowed over the past decade, raising concerns about
whether the economy is struggling or transitioning to a new phase in its development
• In 2024, the economy’s performance was mixed: private consumption and the real
estate sector undermined growth; external trade, mainly exports, was supportive
• One key to converting high savings into spending and boosting consumption lies in
repairing damaged consumer confidence, which could take time
• Policy makers face a tough balancing act as they have to navigate a trade war that is
likely imminent, heightened geopolitical uncertainty and an economy in transition
Introduction
This focus note, written at the close of 2024, carries dual significance. The year marked the 75th anniversary
of the founding of the People’s Republic of China (PRC) by Mao Zedong, while 2025 looms as a milestone
for the “Made in China 2025” national strategy. Launched in 2015, this initiative aims to advance China’s
manufacturing sector, address growing international competition, and enhance economic security. Over
the past 40 years, China’s economy has undergone a profound transformation, often hailed as an economic
miracle. However, this remarkable growth has begun to slow in recent years. Despite this, the size of China’s
economy, its leadership in cutting-edge technological industries, and its growing influence in the rapidly
evolving global geopolitical landscape warrant close attention. This note provides an assessment of
China’s current economic situation and outlines the key challenges it faces. It serves as the starting point
for a series of reports that will explore critical "Made in China" economic themes in greater detail.
In retrospect
Since China began its economic reform and opening-up in 1978, GDP growth has averaged 10% annually.
This period of nearly five decades of unprecedented growth catapulted China to become the world's sec-
ond-largest economy. However, since 2012, the economy has entered a phase of slower growth, with the
average annual growth rate decelerating to 6.3% from circa 10% between 1978 and 2011. Excluding 2020,
Page 2
the year the COVID-19 pandemic disrupted global economies but was largely contained in China, the
growth rate climbs to 6.7%.
As previously cited in analyst reports, the key drivers of China’s rapid growth can be summarized as follows1:
Ý Economic reforms, spanning from the agricultural sector to the development of nonstate-owned eco-
nomic entities and resulting to a more open, market-driven economy from a closed, state-planned
one
Ý Industrialization, transforming China into the world’s manufacturing hub
Ý Rapid urbanization, the fastest in human history, boosting productivity and demand
Ý Globalization, making China the
largest exporter and a major re-
cipient of foreign investment
and technology
Ý The demographic dividend of a
large, young workforce
Ý Increased use of leverage, which
fuelled growth
Ý Also, the decision of western mul-
tinational corporates to redirect
the production to China for cost
efficiency reasons also held a key
stake in the technological spillo-
ver that China was in need for
This period of rapid expansion has
given way in the last decade to slower
growth, driven by several factors:
Þ Declining productivity, largely due to diminishing returns from investment-led growth
Þ Demographic shifts, notably a shrinking workforce due to an aging population
Þ A shift in policy focus from "growth at all costs" to "high-quality growth"
Þ Recent demand-side imbalances, including high household savings driven by precautionary motives in
the face of weak consumer confidence
Þ Ongoing trade and geopolitical tensions, adding uncertainty to global and domestic markets
Economy in transition: from complacency over sluggish growth to addressing
the persistent challenges
Amid increasing concerns expressed from various credible corners about the current state of the Chinese
economy, the country is dealing with an economy undergoing a transition from an investment-led growth
model to one also drawing contributions from consumption. Recent IMF forecasts extending to 2029 indi-
cate that growth will continue to decelerate, though China’s rate of expansion remains more than double
the average of the G7 economies. China’s GDP is projected to grow 4.8% in 2024, down from 5.3% in 2023,
with further gradual cooling to 4.5% in 2025 and 3.3% by 2029. By contrast, G7 economies are expected to
1 https://think.ing.com/articles/china-economy-not-in-a-great-decline-but-in-a-great-transition/
Figure 1: China’s growth rate has diminished in the last
decade. It remains double than the G7 average
Source: IMF, Eurobank Research
Page 3
see stable growth, ranging from 1.7% in 2024 to 1.6% in 2029, with global growth averaging 3.2%, largely
supported by China and other emerging markets, mostly located in Asia.
In Q3 2024, real growth came in at 4.6% YoY, slightly lower than the 4.7% YoY in Q2, but still above the
previous year's growth trend due to a stronger Q1 print (5.3% YoY). With the year-to-September growth
averaging 4.8% YoY, a more robust performance is needed in Q4 to meet the official target of "around 5%"
for FY2024. However, both our estimate and the broader market consensus expect a more conservative
4.8% YoY, keeping the annual growth
rate in line with current levels. Regard-
less of whether the official target is
met or slightly missed, the overall pic-
ture for 2024 has been mixed. Retail
sales during the first 11 months of
2024 grew by 3.5% YoY, less than half
the 7.2% YoY growth seen in the same
period in 2023. On the other hand, in-
dustrial production between January
and November rose 5.8% YoY, up from
4.3% YoY in 2023, reflecting the une-
ven recovery between supply and
demand. Part of the excess produc-
tion was directed towards
international markets through strong
exports that fared strongly in 2024.
Still, the short circuit between excess production and weak domestic demand was mirrored in the defla-
tionary landscape in the last couple of years. Not only CPI, but also PPI, a measure of factory gate prices,
has been negative since October 2022, indicating that companies are forced to reduce prices due to gap
between supply and demand. Consumption has been hindered by weak consumer confidence, which has
remained depressed for the past two and a half years. The consumer confidence index, which dipped from
120 in early 2022 to 86.7 in April 2022 due to lockdowns, has only rarely and briefly surpassed 90 since. As
Chinese consumers have grown more concerned about the economy’s prospects, household savings have
increased. Household deposits accumulated since the pandemic, swelling to CNY65trn2 (USD$9trn) be-
tween January 2020 and August 2024. This has contrasted with what has been the case in other big
economies, notably the US, where households quickly began spending the money they had accumulated.
Several key factors have contributed to the weakened consumer confidence, out of which we pick out the
following:
Ü Social anxiety following strict lockdowns during the pandemic’s later stages.
Ü Labour market insecurity and wage concerns, as many businesses have implemented cost-cutting
measures such as pay freezes, pay cuts, and layoffs to address squeezed corporate profits. This has led
to a sharp rise in youth unemployment, peaking at a record high of 21.3% in June 2023, which prompted
2 https://www.project-syndicate.org/commentary/china-growth-prospects-depend-on-government-meeting-three-key-
challenges-by-huang-yiping-2024-12
Figure 2: Consumption trapped in the reverse relationship
between consumer confidence and household savings
Source: Bloomberg, Eurobank Research
Page 4
China’s statistical bureau to halt publication of this key figure. While youth unemployment has since
decreased to 16.1% in November, it remains elevated, weighing on private consumption and the hous-
ing market.
Ü The ongoing real estate crisis, especially since Evergrande Group’s 2021 default, which remains unre-
solved despite various support measures. Residential property sales have contracted more sharply in
January-November, falling 20% YoY, compared with a decline of 3.7% YoY in the same period of 2023.
On a similar footing went also prices that continued to drop. In November 2024, new home prices in
70 Chinese cities fell by 5.7%YoY, following a 5.9%YoY decline in the previous month - the steepest drop
in over nine years. This marks the 17th consecutive month of price decreases, indicating that Beijing’s
ongoing efforts to address the prolonged downturn in the property sector, including lowering mort-
gage rates and reducing home buying costs, have not yet succeeded in reversing the negative trend.
Yet, the economy also has its buffers that came in the shape of exports for 2024. As of November data,
Chinese export volumes have increased by 13%YoY, with electric vehicles and semiconductors providing
much of the impetus, while import volumes have risen by only 2%. Given that exports3 account for ap-
proximately 20% of GDP, this 10ppts gap suggests a net export contribution to the headline GDP
growth of nearly 2% despite the externally challenging environment. Part of this export momentum in
the second half of 2025 is due to companies frontloading purchases due to concerns over future tariffs,
making it questionable whether this performance will continue in 2025.
Policy Playbook: “fiscally proactive and monetarily looser”
After mixed economic data in the first half of 2024, the Politburo and economic policymakers, once hesi-
tant, now appear fully convinced of the need for a substantial stimulus package to set the economy on a
more sustainable growth trajectory. To achieve this, the disconnection between demand and supply must
be addressed, which requires restoring consumer confidence to stimulate private consumption. Rebuilding
consumer confidence is likely to be a gradual, multi-phase process, requiring clear communication and
policy changes. It remains to be seen whether the measures introduced since September by Chinese poli-
cymakers incorporate these elements effectively.
For now, the stimulus strategy consists of several key components, including:
Ü A more proactive fiscal policy, accompanied by a higher deficit-to-GDP ratio which is expected to be
set at 4% in 2025 from 3% in 2024
Ü A shift in monetary policy from "prudent" to "moderately loose," aimed at improving liquidity conditions
and boosting market confidence.
Ü Increased issuance of ultra-long special treasury bonds to fund large-scale equipment upgrades and
consumer goods trade-ins.
Ü Renovation programs for shantytowns and dilapidated houses, along with efforts to control the supply
of new real estate land, make better use of existing land resources, and optimize the development of
commercial and office properties. These initiatives are designed to foster a new growth model for the
real estate sector.
These measures were highlighted during two important political meetings in December, closely watched
by market participants. On December 9, China’s Politburo, led by President Xi Jinping, shifted its monetary
3 https://www.cfr.org/blog/chinas-stunning-2024-export-growth
Page 5
policy stance from "prudent" to "loose" for the first time since 2010, when a similar shift was made to support
the post-global financial crisis recovery. This announcement improved confidence, driving 10-year bond
yields to record lows below 1.9%, and pushing major stock indexes to monthly highs in the following session.
The focus then shifted to the Central Economic Work Conference (CEWC) held on December 11-12, which, as
expected, aligned with the Politburo’s policy directives.
What does Trump 2.0 hold?
The two meetings came soon after the election of Donald Trump in the US, whose campaign prominently
featured the imposition of heavy tariffs on all imports from China. While he promised during the election
campaign to impose 60% tariff on Chinese goods, this might just be a negotiation tactic. An alternative
scenario is a phased approach, such as a 10% tariff increase in the first half of 2025, followed by another
10% in the second half, which would be less disruptive to the US economy.
Overall, a second Trump presidency
presents a complex and challenging
outlook for China, marked by the risk
of heightened trade tensions, eco-
nomic disruption, and increased
geopolitical uncertainty. China is ex-
pected to respond with a combination
of retaliatory measures, diplomatic ef-
forts, and initiatives to strengthen its
domestic economy. The situation re-
mains fluid, and the specific details of
Trump’s policies, as well as China’s re-
sponses, will be crucial in shaping the
eventual outcome.
One lesson from the first Trump term
and the 2018 trade war is the resili-
ence of China’s global export share. Despite tariffs, China did not experience a significant decline in overall
export volumes, partly due to its increased openness to free trade and its ability to diversify export desti-
nations. In fact, the trade war led to a shift in China’s export focus, with exports to emerging and developing
economies nearly doubling from 2018 to 2023. This diversification helped offset the decline in exports to
the US. As a result, China’s export exposure to the US, as a percentage of GDP, has decreased, with exports
to the US now accounting for just 3% of GDP, down from pre-trade war levels. This suggests that the impact
of potential US tariffs on China’s economy may be less severe than in the past.
What’s at stake? To fall or not to fall in the “middle-income trap”
The Chinese economy is facing several key challenges and potential shifts, both domestically and interna-
tionally, that could have significant implications:
Ü Economic Growth and Transition: slowing growth, a lingering real estate crisis, weak domestic demand,
and the risks associated with economic rebalancing.
Figure 3: The 2018 trade war roiled Chinese financial markets.
Could be heading towards a repetition?
Source: Bloomberg, Eurobank Research
Page 6
Ü Trade and Geopolitical Risks: potential for severe US tariffs that could disrupt vital trade prospects, as
well as escalating tensions with Taiwan and/or in the South China Sea.
Ü Structural Issues: declining productivity as China approaches the status of an advanced economy, cou-
pled with the challenges posed by an aging population.
Many of these factors are part of the broader "middle-income trap," and China faces a genuine risk of
falling into it. To avoid this, China must implement significant structural reforms, shift its economic focus
towards consumption and services, and further strengthen its technological capabilities. The success of
China's economic transition will depend on the government's ability to address these challenges and im-
plement the necessary reforms to create a more sustainable and balanced growth model. While these are
the key tools from an academic and theoretical standpoint, the outcome will be much more complex and
will require close monitoring.
Page 7
Research Team
Marcus Bensasson
Research Economist
mbensasson@eurobank.gr
+ 30 214 40 65 113
Dr. Stylianos Gogos
Research Economist
sgogos@eurobank.gr
+ 30 214 40 63 456
Maria Kasola
Research Economist
mkasola@eurobank.gr
+ 30 214 40 63 453
Koroli Panagiota
Administration Officer
pkoroli@eurobank,gr
+ 30 214 40 63 430
Dr. Konstantinos Peppas
Research Economist
kpeppas@eurobank.gr
+ 30 214 40 63 520
Paraskevi Petropoulou
Senior Economist
ppetropoulou@eurobank.gr
+ 30 214 40 63 455
Dr. Theodoros Rapanos
Research Economist
trapanos@eurobank.gr
+ 30 214 40 59 711
More available research at: https://www.eurobank.gr/en/group/economic-research
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Research Economist
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Senior Economist
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