by Frank Chen in SCMP, Oct 21, 2023
Overcapacity in the electric vehicle and other sectors, the ailing property market and mounting local government debts are likely to compromise economic recovery efforts and cloud China’s prospects in 2024, leading economists and academics warned on Friday.

China could kick off the new year with a bigger bounce, but momentum may taper off later as risks weigh heavier on economic growth, Shanghai University of Finance and Economics president Liu Yuanchun told a webinar.

Thanks to a slew of supportive measures to stem downturn risks since July, China’s economy rebounded modestly in the third quarter, rising by 1.3 per cent from the previous three months and gaining 4.9 per cent year on year.

However, business confidence and property investments have remained weak, while concerns over the sustainability of the recovery remain.

The world’s second-largest economy, though, is expected to hit Beijing’s “around 5 per cent” target for 2023 following the release of the third-quarter data this week.

But the International Monetary Fund, the World Bank and other institutions have cut their 2024 growth forecasts to 4.4 per cent or lower.

Liu, who was among select economists sought by Premier Li Qiang for policy recommendations at a State Council meeting last week, urged Beijing not to set China’s 2024 growth target “too low”.

“We need to set the [GDP growth goal] at 4.5-5 per cent to prove Western detractors wrong and instil confidence,” said Liu, adding the economy still had immense potential to be extracted.

China, though, would still have to contend with old and new risks next year as they may sap growth, he added.

Liu said Beijing should consider new reform commitments at a key political event later this year to inject positivity and to address a host of challenges to continue to build momentum.

Top cadres of China’s Communist Party are set to convene the third plenum of the 20th party congress in coming months, with the gathering typically focusing on economic issues. Hopes have mounted that the meeting could roll out forceful measures to consolidate the recovery footing for the coming months.

“Risks will intensify next year. The troubles facing the property sector are not going anywhere. Home prices in Beijing and Shanghai are stabilising, yet not so in Guangzhou or Shenzhen, and lower-tier cities face bigger uncertainties,” added Liu

“We don’t know how developers’ debt default drama will play out,” he added, while warning policymakers’ “indecision and inaction” would compound the challenge.

Liu also said the debt restructuring plan announced at July’s Politburo meeting “would only ease some immediate woes but won’t address underlying issues of how local governments usually binge on borrowings”.

Beijing is facing a “monumental” challenge to unwind China’s local government debt crisis, according to US rating agency Standard & Poor’s.

They estimated that local government financing vehicles – created to aid off-budget financing, especially for infrastructure spending – collectively owe about 60 trillion (US$8.2 trillion) in debt.

Liu also cautioned that China’s freewheeling electric vehicle and battery-making surge, which saw carmakers and local governments launch new projects, could lead to new overcapacity issues and stifle growth.

Over the past decade, as many as 500 electric vehicle start-ups have mushroomed in China, but just 200 carmakers are certified by Beijing for mass production.

“Small and underachieving players will be unable to survive and many car and battery plants will become derelict,” said Cao Hua, a partner at private-equity firm Unity Asset Management.

And after consumption contributed to almost 95 per cent of China’s gross domestic product in the third quarter, Yu Chunhai, a deputy dean at Renmin University of China’s School of Economics, also doubted if the boost to the economy would be sustainable.

“[That] kind of revenge spending spree will wane and the sustainable way forward should be buoyant private investment,” said Yu.

Economists also renewed calls to boost spending, including by direct cash handouts.

Ning Jizhe, former director of the National Statistics Bureau, said in an opinion piece in the People’s Daily this month that policymakers should focus on boosting consumption, especially home and car purchases.

Ning also urged “forceful implementation” of supportive measures for the private sector to encourage investment, and tailoring solutions to common problems facing a big cross section of businesses, such as inadequate orders and triangular debt troubles.

He also backed extending employment support measures to reverse rising youth unemployment.

“The data shows the economy is improving, but there is a big gap between data and how the rank-and-file feel about the economy and their livelihoods,” added Yu. https://www.scmp.com/economy/china-economy/article/3238678/chinas-economic-risks-will-intensify-2024-evs-property-market-local-government-debts-clouding