In our first economic letter of the year, we focus on China. Despite positive economic surprises in recent months (Chart 1) and growth now on track to meet the “around 5%” target, China’s recovery remains uneven and subject to downside risk. In response, China’s authorities have rolled out more fiscal and monetary easing measures (Chart 2), broadening both their scale and their scope. However, some observers continue to question whether these measures will be effective, particularly in addressing deeper structural issues.
Amid expectations of low interest rates and concerns about a deflationary spiral, investors have bought more Chinese bonds, driving yields to record lows (Chart 3). The continued decline in bond yields prompted the authorities to intervene on Friday and halt further bond purchases. Looking ahead, China faces several challenges, with US trade policy, in particular, a key concern (Chart 4).
Ahead of potential US trade actions, producers and importers have taken precautionary steps, boosting supplies, and thereby driving China’s export growth in recent months (Chart 5). Nonetheless, export prices have continued to decline, and the yuan has weakened further. Against this backdrop there will be much interest in this week’s upcoming data releases, including the highly anticipated Q4 GDP report (Chart 6).
Recent developments Although there have been some positive developments, lingering macroeconomic challenges persist. On the one hand, the extent of economic surprises in China, as shown in Chart 1, remains largely positive, with a flurry of positive surprises late last year. On the other hand, concerns in sectors like the property market continue to weigh on the economy. Moreover, the pace of China’s economic recovery remains uneven across sectors, as reflected in the latest PMI readings. The manufacturing sector shows only mild expansions, while the non-manufacturing sector continues to grow at a faster pace. Nonetheless, President Xi has recently stated that China is on track to meet its growth target of "around 5%" for 2024. China’s real GDP growth has certainly stayed close to the 5% target, narrowly missing it with a 4.8% year-over-year growth in Q3.