Our economic outlook for China
July 25, 2024
Our outlook for year-end 2024
5.1%
Economic growth,
year over year
Sluggish second-quarter growth (0.7% quarter over quarter, 4.7% year over year) was in line with our nonconsensus view. In the second half, we expect the economy to regain some ground and stabilize toward trend growth, with export and manufacturing investment as a tailwind. China has set a goal for full-year 2024 growth “around 5%.” We continue to foresee China growing by 5.1% for the full year, though supply and demand that remain out of balance could challenge that growth’s sustainability.
1%
Core inflation, year over year
The pace of inflation as measured by consumer prices rose by 0.2% year over year in June, less than the 0.3% pace of both May and April. Producer prices fell for a 21st straight month, by 0.8% year over year, less than the 1.4% in May. We foresee full-year core inflation around 1% and full-year headline inflation of 0.8%, which would be well below the 3% inflation target set by the People’s Bank of China (PBOC).
1.6%
Monetary policy rate
Soon after changing its policy rate, the PBOC lowered the new benchmark, the seven-day reverse repo rate. The PBOC cut the key rate from 1.8% to 1.7% on July 22, the first such reduction since August 2023. The PBOC additionally lowered banks’ prime lending rates by 10 basis points and relaxed banks’ medium-term lending collateral requirements. These actions aim “to further strengthen counter-cyclical adjustments and enhance financial support for the real economy.” Recent economic data have spurred policymakers to try to boost business confidence and domestic demand. Vanguard foresees the seven-day reverse repo rate being cut to 1.6% by year-end 2024.
The PBOC since June has emphasized the open market reverse repo rate as its policy rate while playing down the role of the previous benchmark, the 1-year medium-term lending facility rate (MLF). The main shortcoming of the MLF—which became China’s key policy rate in 2019 as the PBOC intended to introduce more market-based pricing of bank loans—is its weak relationship with short-term market rates. It has a much longer maturity than the policy rates of most other major central banks. In practice, its weakness became evident in the last year. Because of weak credit demand, banks didn’t want to borrow from the MLF when they could get less expensive financing from other sources. On July 25, the PBOC made a surprise 20-basis-point cut to the 1-year MLF, from 2.5% to 2.3%, indicating that policymakers aim to boost economic growth in a timely manner.
5.1%
Unemployment rate
We foresee the unemployment rate remaining around current levels over the course of the year, below the government’s 5.5% target. Vanguard believes that structural mismatches in labor demand and supply, particularly among the youngest workers, may not be easily addressed in the near term and may require additional policy support.
What I’m watching
The mixed impact on global goods prices from China's uneven recovery
The idea that China is “exporting deflation” doesn’t hold globally. Although its excess manufacturing capacity amid tepid domestic demand helps lower goods prices in the U.S. and the euro area, China’s booming manufacturing and infrastructure investments drive up energy and industrial metals prices, which especially affects commodities producers such as Australia.
Grant Feng,
Vanguard Senior Economist
Notes: We use China’s export prices as a proxy for the impact of excess capacity and China’s fixed asset investment as a proxy for the impact of investment demand. We expect a 6% drop in export prices this year and a 5.5% increase in fixed asset prices. We use a vector autoregressive model incorporating each economy’s output gap, policy rate, and goods price inflation, and China’s export prices and fixed asset investment to estimate China’s spillover to goods inflation.
Source: Vanguard calculations using data from CEIC as of June 8, 2024.
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