China's Q4 outlook 2023

Analyzing the impact of declining property investment, currency depreciation, and government measures on China's economic landscape

By Nadia Elbilassy | @Nadia Elbilassy | 31 October 2023

China’s economic activity remains subdued (1)
  • Market sentiment sours post-zero-covid policy, posing challenges in the wake of a declining property sector, weakened currency, and subdued international demand.

  • Signs of recovery in industrial production provide a glimmer of hope, but economic forecasts hint at a resumption of the slowdown in 2024.

  • Global economic outlook improves for the current year, but growth forecasts for China and beyond are tempered, emphasizing ongoing challenges.

Market sentiment towards China has soured considerably following the ending of the zero-covid policy. Following a brief economic recovery after all covid restrictions were lifted, the country has faced several formidable challenges, not least of which are the debt burdened property sector, a declining currency, and a subdued international demand for Chinese exports of manufactured products. Declining investment in the property sector poses a particularly significant risk to the economy, given that it has the potential to dwarf the support measures the authorities have so far implemented in an attempt to boost economic activity.

Going forward, we expect the slowdown in the property sector to persist and potentially expand as a greater number of property developers struggle to meet their debt obligations. This will potentially lead to a situation where housing projects remain uncompleted even though buyers have already secured mortgages to purchase.

Data from the National Bureau of Statistics showed the pace of decline in the sector to be accelerating, with overall property investment falling by 19.1% year-on-year, an increase on the 17.8% annual drop seen in July. This in turn is impacting negatively on public finances, as falling land prices reduce the value of land sales held by local authorities. Data from the Chinese Finance Ministry suggests the total value of land sales fell in August for the 20th consecutive month, placing an increasing burden on already stretched local official finances.

Where it all started

After a sales peak in 2020, some prominent developers, including China Evergrande Group, faced rising defaults in 2021 as the government took action to clamp down on property speculation. Two years later, property sales and prices are continuing to decline, with fears now growing that Country Garden could also now be in financial difficulty, raising fears about the potential for financial contagion.

The People’s Bank of China (PBoC)

Despite considerable government support, Chinese economic activity remains subdued, although recent data suggests signs of stabilization are now being seen.

The People’s Bank of China (PBoC) maintains that it has ample policy flexibility to bolster the economy's rebound, raising expectations that additional measures, including the potential for further interest rate reductions, may yet be implemented, following the pause seen earlier this month. It is entirely plausible that the PBoC may be taking a ‘wait-and-see’ approach to gauge the impact of its prior easing actions, which include interest rate cuts in August and a reduction in the reserve requirement ratio (RRR) for banks end-September, before taking further action.

Currency-wise, the growing interest rate differential between China and the United States has led to capital outflows, exerting downwards pressure on the yuan. With the PBoC expected to further ease monetary policy going forward as it attempts to boost growth, so we expect the yuan to depreciate further.

“Modest improvement coming on the data side in 2023”

Partly in response to the monetary easing measures seen to date, we expect a modest improvement to be seen in Chinese economic data over the coming months, which will help to alleviate concerns about the strength of activity in the key industrial and manufacturing sectors. Encouragingly, industrial production showed signs of recovery in August, expanding by 4.5% compared with August 2022. However, in line with the latest economic forecasts provided by the Organization for Economic Co-operation and Development (OECD), the slowdown is expected to resume in 2024. In fact, the OECD has raised its global economic outlook for this year but cut growth forecasts for 2024.

the OECD has raised its global economic outlook for this year but cut growth forecasts for 2024.