Economic growth will slow to 4.9% in 2024 and gradually weaken further in 2025 and 2026. Housing starts will continue falling, but infrastructure and manufacturing investment are growing at a steady pace with public investment strengthening on the back of stronger local government debt issuance. Consumption growth will remain sluggish, dampened by high precautionary savings. Export growth will be relatively strong. Consumer price inflation will remain very low. A tightening of global trade restrictions could curb Chinese industrial activity, but recent policy measures could boost confidence and consumption by more than expected. Credit events could disrupt the orderly adjustment in the property sector, thereby weighing on growth, while too much support would revive investment but could lead to costlier adjustment subsequently.

Monetary policy has become significantly supportive with a series of cuts of the reserve requirement ratio, the policy and prime interest rates, and interest rates on existing mortgages. A new swap facility for non-bank financial institutions aims to boost investor confidence, stabilise the capital market and enhance liquidity. Housing support measures have been extended, including easing prudential regulations for second houses. Fiscal policy continues to support infrastructure and now also incomes. Raising the local government special debt quota and debt swaps will boost funds available for projects. Better matching of skills and education to those demanded by the market would help to address skills shortages and reduce youth unemployment, which has been high.

Year-on-year growth in the first three quarters of 2024 slowed to 4.8%. Property investment is still declining due to continuing weakness in real estate markets, weighing on growth, but at a slower pace. Infrastructure investment has been growing at a steady but moderate rate, while manufacturing investment has been robust on the back of strong export demand. Industrial production has been robust, driven by high-tech industries. Consumption growth is sluggish due to on-going high precautionary saving. CPI inflation was 0.3% year-on-year in October 2024 with declines in some services prices, such as transportation and telecommunications. Lower input prices have been a key driver of falling producer prices in upstream industries. Productivity improvements, quality upgrades and innovation are helping to keep prices low, alongside a relatively weak consumption recovery. The urban youth unemployment rate has edged down in three successive months, but at 17.1% in September still remains high.

The rebound of external demand has spurred Chinese exports, especially in high-tech industries. Lower input prices keep Chinese exports competitive. Goods imports have also strengthened slightly, but reduced reliance on imported inputs and the low import content of consumption prevent a stronger rebound. A weak recovery of tourism imports has limited total import growth and boosted the current account surplus.

Monetary policy eased significantly in the autumn of 2024 to support the recovery and ensure adequate liquidity. Interest rates and the ratio of reserves to be kept at the central bank have been reduced multiple times, including a 20 bp cut in the primary policy rate in September and a 25 bp cut in both the 1-year and 5-year loan prime rate (LPR) in October. The benchmark mortgage rate has been cut, and a new mortgage rate adjustment mechanism allows lower premia, particularly in cities where property prices are falling. Mortgage contracts with flexible rates can now be adjusted more frequently than annually. Easing prudential regulations, such as less restrictive downpayment requirements for second houses and the possibility to sell an apartment with a mortgage, have started to spur transactions, especially in megacities and first-tier cities as well as resort towns. Relaxation of requirements for the relending quota for state-owned enterprise purchases of unsold but completed housing will also support housing demand.

Fiscal policy has become more expansionary in 2024, as the central government started issuing ultra-long maturity bonds, with a duration of more than ten years, (worth 0.8% of GDP in 2024) to finance priority projects. Moreover, some unused special local government bonds issued in 2023 are supporting projects in 2024, amounting to some 0.4% of GDP. The local government special bond quota was raised in November and bonds worth 1.5% of GDP are planned to be issued in 2025 and 2026, as in 2024. To ease the debt servicing burden of local governments, they can swap implicit debts worth up to 3% of GDP for explicit local government debt by 2028, thereby addressing most of the implicit debt recognised so far. Greater scrutiny of local special bond financing will help to ensure higher efficiency. While resolution plans have alleviated the burden of heavily indebted local governments, the core imbalance between revenue assignments and spending responsibilities at sub-national government levels has yet to be addressed, and local governments continue to face financial pressure from lower real estate prices. The Third Plenum envisages the centralisation of some key spending responsibilities. This is welcome as it will guarantee a minimum level of public services country-wide. Project financing is to be better monitored, and funding will be allocated to approved projects only. The “cash-for-clunkers” programme, aiming at upgrading machinery, equipment and appliances, will support both consumption and investment. Overall, policies will remain supportive in 2025-26.

The Chinese economy will continue to slow gradually with falling potential growth due to unfavourable demographics and slower productivity growth. Ongoing adjustment in the real estate sector will continue to weigh on residential investment and on related items of consumption, such as furniture sales. However, infrastructure investment will pick up, helped by greater local special bond issuance. There are pressing needs related to the green transition, urban village redevelopment and other environmental and social targets. Consumption growth is expected to remain stable and unlikely to pick up as long as the lack of social security reforms keeps precautionary savings high. Technological upgrading and competition in the domestic markets will likely keep exports competitive, despite faster rising unit labour costs than in other countries. Tourism imports, the largest single component of imports, may not recover to pre-COVID-19 levels. The current account surplus is projected to rise further. Inflation will return to more normal, but still low levels.

Risks to growth are tilted to the downside. Potential further credit events may disrupt the orderly adjustment process in the real estate sector. Excessive relaxation of demand-side restrictions in the property sector could result in stronger growth, but also in a further build-up of imbalances and sharper adjustment in the future. Delaying addressing the funding gap at sub-national government levels may lead to further accumulation of implicit debt and costly resolution later. Postponing social security reforms may keep uncertainty high and also entrench higher precautionary saving behaviour. An increase of global trade restrictions would slow export growth and industrial activity. Fiscal expansion coupled with more stringent measures to raise spending efficiency may lift the impact of the spending and result in higher growth. The reduced mortgage interest burden on households may result in somewhat higher consumption.

Supportive monetary, fiscal and financial policies will help to hold up demand in the short run. Allowing borrowers to repay their mortgages early without penalty and move their loans to other banks would lower mortgage costs and increase competition in banking. In the longer term, a stronger social safety net is needed to rebalance the economy towards consumption and reduce savings. Unemployment insurance coverage needs to be extended to all, and pensions provide at least a minimum standard of living to all eligible people. Furthermore, the list of treatments and medicines covered by health insurance needs to be widened so that health costs do not push people into poverty. Labour shortages in some professions would be overcome by better matching the skills needed by the market to those acquired at school. Some technical and soft skills such as computer coding and sales and marketing are in greatest deficiency. Career guidance needs to start at a young age with sufficient information about the chances of finding a good job and about starting and average salaries. With the sharp increase in tertiary graduates, a more practically-oriented curriculum and more internship opportunities would help to develop the required skills. In addition, the tarnished image of vocational education needs to be changed by improving teacher and curriculum quality, reducing the focus on early tracking and streaming, and popularising vocational professions among children.