SFC Markets and Finance | Yi Xiong: Confident in China's economic growth outlook

南方财经全媒体记者 李依农 上海报道

Editor's note:

After over 40 years' booming, is China's economy collpasing? The recent data gave the answer. China's economy grew faster than expected in the first quarter, showing its strong growth momentum. At the same time, Goldman Sachs, Morgan Stanley, UBS and Deutsche Bank lifted their forecasts for China economic growth. Despite challenges and uncertainties, how will China's economy perform this year? Has China's economy peaked? Chief economists and chief investors from financial institutions will share their insights to SFC Markets and Finance's "Chief's View on China".

The first-quarter report of China's economy shows steady progress, with the positive momentum of recovery continuing to consolidate and strengthen. Meanwhile, recent data released by the General Administration of Customs indicates that in the first four months of this year, the total value of China's goods trade import and export reached 13.81 trillion yuan, marking a 5.7% year-on-year increase. The foreign trade sector is demonstrating positive momentum. The International Monetary Fund predicts that in 2024, China will remain the engine of economic growth in the Asia-Pacific region and globally.

How should we interpret the economic situation in the first quarter, and what are the future growth prospects? Yi Xiong, Deutsche Bank China's Chief Economist, shares his perspectives on these questions in an exclusive interview with SFC.

Dr. Xiong noted that both China's industrial and service sectors exhibited robust growth in the first quarter, reflecting improving consumer confidence and consumption levels. Export growth has also made a positive contribution to overall industrial production.

Looking ahead to future growth prospects, Dr. Xiong expects China's economy to sustain stable growth driven by improved enterprise competitiveness, proactive economic policies, and strengthening consumer confidence. China is anticipated to continue playing a pivotal role in driving economic growth in the Asia-Pacific region and globally, with sustained positive performance expected in both the foreign trade and service sectors, supporting overall economic expansion.

SFC Markets and Finance: China's GDP growth in the first quarter of 2024 rising by 5.3% year-on-year, exceeded expectations. What are the key factors driving this growth?

Yi Xiong: Regarding China's GDP growth in the first quarter, it indeed exceeded everyone's expectations. If we look at the sources of growth, we see that both the industrial and service sectors achieved good growth. The service sector saw approximately 5% growth, while the industrial sector grew by 6%. However, this does not mean that the industrial sector performed better, as we have to consider the base effect from last year's first quarter, where the industrial base was relatively low, and the service sector has already started to recover. So, considering the base effect, we can say that both the industrial and service sectors performed beyond our expectations.

If we consider the service sector, it reflects that the consumer sentiment among Chinese residents is in the process of recovery. We also observed, for example, travel during the Chinese New Year holiday and catering among other industries, have all performed very well. This demonstrates that there is indeed a continued and sustained recovery in service consumption and a process where people's consumption is further growing.

As for the industrial sector, we feel that its performance has also been better than expected. One factor in this could certainly be China's domestic demand. We've seen some products selling well. Also, I think exports have played a certain role in driving the entire industrial production because last year the entire global export market was contracting. But starting this year, we've seen the entire export sector, not just in China but globally, experiencing restorative growth. This has also contributed to a certain enhancement in China's industrial production.

Of course, we also see that there are still some deficiencies in the economy. The first is that the price level might still be experiencing a relatively low rate of increase. The second is the entire real estate market, including related industrial chains such as construction, along with the overall investment's driving effect on the entire economy. It might still be at a relatively lower level compared to historical figures.

However, overall, we think that the economic performance in the first quarter has exceeded everyone's previous expectations. This also reflects the resilience and strength of China's economic recovery.

SFC Markets and Finance: We also noticed that Deutsche Bank has raised its forecast for China's full-year GDP growth in 2024 by 0.5 percentage points to 5.2%. What considerations primarily drove this adjustment, and from which aspects does the confidence stem?

Yi Xiong: I think the reasons for raising the growth target mainly involve three aspects.

As mentioned earlier, the overall economic performance has been good, and the reason behind this, I think the first is that in the entire Chinese economy, especially some market entities, the competitiveness of enterprises is improving. This is related to what we see, for example, in exports.

It is also closely tied to the sales of China's domestic products. For instance, in the automobile industry, indeed, Chinese automakers are very quick with technological upgrades and product innovation, which also stimulates a certain level of demand. So, the enhancement of overall business competitiveness, I believe, is the first source of confidence in growth.

And the second source comes from the perspective of policy. This year, our economic policy setting is relatively proactive, aiming to ensure a growth target of 5%. To achieve this growth target, there are also corresponding policies to ensure stable growth. Many of these policies will start to take effect from the second quarter of this year. For example, we see government bond issuance, special treasury bonds, to support the construction of major projects. Also, initiatives like trade-ins of consumer goods, and equipment renewals, and so on. These policies will also start to take effect in the second quarter. This also gives us more confidence in the future growth rate of the economy.

Thirdly, from our own observation, is from the viewpoint of consumption. We believe a phenomenon is occurring, where although the overall real estate market may still be in a relatively sluggish state, and there is pressure for housing prices to fall, people are more willing to consume. This may reflect when we notice that consumers realize that future house prices may not increase hugely, and after mortgage rates have decreased, the actual burden of housing is reduced. Thus, when people do the math, they can see that they can spend more.

I think these three aspects are likely the reasons we are becoming more optimistic about the entire Chinese economy and have raised the growth forecast.

SFC Markets and Finance: You have mentioned that China's economic growth target for 2024 will be a crucial factor in determining future trends. Why is that?

Yi Xiong: Let's look at the Chinese economy. Certainly, the growth over the past quarter was above 5%, which is good. Last year, it also achieved a 5% growth rate. However, if we look over a longer period, the growth rate of China's economy has slowed down. So, we have made some estimates, and the results of our estimates indicate that the current growth rate of the entire Chinese economy is still likely to be relatively low, compared to the potential growth rate the economy could achieve.

So compared to its potential, the best performance has not been realized. That is, in a term of economics, there is a negative output gap, meaning the economy could perform even better. The reasons it has not performed better yet are likely due to constraints such as insufficient demand, preventing the economy from returning to its ideal track.

So, against this backdrop, I think the approaches to reducing the output gap, and bringing the economy back on track, are not only important for the Chinese economy this year, but also significant on its performance in the coming years. Therefore, with this consideration, we still set this year's economic growth target at 5%, and aim to narrow the economic output gap, and stabilize prices more effectively. I believe for the growth in the next 3 to 5 years, all these measures will have a positive impact on the Chinese economy.

SFC Markets and Finance: You mentioned potential. So, how can we further exert influence through monetary and fiscal policies? What kind of space is there for policies?

Yi Xiong: The biggest problem with the Chinese economy right now is insufficient demand. This insufficiency is mainly evident in several areas. In this, there are two particularly important aspects. One is the price level. The growth rate of prices is still at a relatively low level. The second is the entire industry of real estate. Although there may be some signs of stabilization, there hasn't been a significant rebound yet.

So, I think if we want to solve the problem of insufficient demand, then we still need to make more active progress in these two aspects. These are areas where both fiscal and monetary policies can be effective.

As for the monetary policy, I think there is also further scope. Considering that since prices now, including CPI and PPI, have come down so much, the actual real interest rate is still relatively high. Under such circumstances, I think continuing to lower nominal interest rates appropriately, thus reducing rates, would encourage people to reduce savings and increase consumption or investment. This is also an essential role for monetary policy to stabilize prices and boost economic growth.

For the real estate, I think this is also an area where monetary and fiscal policies can work together. It has indeed gone through a three-year downturn. To reverse the current expectations, it may require both monetary and fiscal policies to work together from both the demand and supply sides, and make further improvements, to stabilize price expectations. This could ensure the real estate market to develop better.

Historically, whenever fiscal policy spending is high, prices tend to rebound and rise. Therefore, fiscal policy, whether focused on consumption or investment, has further room to stimulate demand.

As for monetary policy, there is also additional scope to consider. Given that prices, including CPI and PPI, have decreased significantly, the real interest rate remains relatively high. Under these circumstances, I believe that continuing to appropriately lower nominal interest rates can encourage reduced savings and increased consumption or investment. This is crucial for monetary policy to stabilize prices and support economic growth.

In the real estate sector, I think this is an area where monetary and fiscal policies can synergize. Having experienced a three-year downturn, reversing current expectations may require coordinated efforts from both monetary and fiscal policies, addressing both demand and supply sides to stabilize price expectations. This could lead to a healthier trajectory for the real estate market.

SFC Markets and Finance: You mentioned the meeting of the Political Bureau this April. What are the highlights of the meeting overall, and what signals has it sent?

Yi Xiong: There were several significant highlights from the Political Bureau meeting. Given time constraints, I'll emphasize what I believe are the two most important points.

Firstly, the new statements regarding real estate policy are particularly noteworthy and encouraging. One new expression that stood out is the focus on reducing housing inventory, addressing a key contradiction in the real estate industry. After three years of market downturn, there's a significant buildup of housing stock waiting for buyers and reducing this inventory could stabilize prices and market activity. The meeting proposed further study into policies for reducing housing inventory, such as investing in major projects, constructing affordable housing, and converting some housing into affordable units. These measures are anticipated to be effective in the coming months.

Secondly, the confirmation of the Third Plenary Session of the 20th CPC Central Committee is also important. Despite short-term challenges, China's long-term economic growth remains on a positive trajectory. The experience of China's economic development underscores the necessity of ongoing reforms and opening up to unleash market vitality and drive economic growth and income expansion. These developments are worth anticipating, with potential for more positive policy factors in the future.

SFC Markets and Finance: Against the backdrop of optimistic economic growth prospects, how do foreign investment institutions view and anticipate Chinese assets?

Yi Xiong: In recent weeks, there has been a noticeable shift in sentiment among foreign investors towards China. For instance, the Hong Kong market has seen a significant uptrend rarely seen in the past five to ten years. Many foreign institutions are now expressing that "China is back in the game." Several factors contribute to this sentiment shift.

Firstly, Chinese A-shares, Hong Kong stocks, and related assets are currently undervalued compared to global markets due to recent underperformance. This positioning has led to an underweighting of Chinese assets in global portfolios, prompting many foreign institutions to consider increasing their exposure to these assets.

Secondly, improvements in China's economic outlook, with stabilization and rebounding growth in the first quarter, are reducing downside risks. This improvement makes foreign investors more willing to allocate funds into Chinese assets.

Looking ahead, sustained positive performance in Chinese assets will likely require further fundamental improvements in the Chinese economy. Continued policy implementations and increased consumer confidence could support Chinese asset performance, positioning them to lead globally in the coming quarters.

SFC Markets and Finance: How will global central bank policies, especially the monetary policy of the Federal Reserve, and the upcoming U.S. election potentially impact the global financial markets?

Yi Xiong: Let's talk about the Federal Reserve first. The policies of the Federal Reserve have a very significant impact on global financial markets. The interest rates and exchange rates of the U.S. dollar influence the risk appetite for global asset allocation. When the dollar strengthens against other currencies and U.S. interest rates are high, people tend to think that risk-free assets, like U.S. Treasury bonds, already offer high returns, so there's no need to take on greater risk by investing in other assets.

Although the timing of rate cuts by the Federal Reserve has faced setbacks earlier this year, the market still expects the Fed to cut rates by the end of the year. Other central banks may cut rates even earlier, such as the European Central Bank possibly starting rate cuts by mid-year. In this environment, as the expectation of Fed rate cuts materializes, risk assets may become more attractive.

Compared to the Fed's policy, I think the U.S. presidential election may add more uncertainty. Based on current polling results, this year's U.S. election outcome remains very uncertain. The election result will create significant uncertainty for U.S. economic policies. If Trump is re-elected, he might increase tariffs globally, including on China, which would add uncertainty to global trade and economy. Additionally, the election result might increase global geopolitical uncertainty. Therefore, the U.S. election is a major event for investors to consider, potentially impacting investments and asset prices.

SFC Markets and Finance: In the latest World Economic Outlook report released by the International Monetary Fund (IMF), the global economic growth forecast for 2024 was revised upward to 3.2%, an increase of 0.1 percentage points from the January forecast. What are your prospects for the global economy?

Yi Xiong: The IMF's revision of growth rates aligns with our expectations, as the global economy has shown signs of improvement or stronger resilience from the beginning of the year to now. Not only have Chinese institutions revised our economic growth forecasts upward during this period, but our colleagues in the US and Europe have also raised their predictions for economic growth.

This indeed reflects the resilience of the global economy because at the beginning of the year, there was pessimism about global economic performance, with expectations of lower growth rates compared to the previous year. However, it now appears that this year's economic growth is on an upward trajectory and may even approach last year's growth rate. Therefore, I believe this improvement reflects positively on economic performance.

The key sources of improvement are likely the United States and China. The US economy has demonstrated resilience, with strong performance in its job market and prices, and China's economy has also shown improvement. When these two major economies show significant improvements simultaneously, people become more optimistic about global economic growth, which is reasonable.

SFC Markets and Finance: How do you view China and Asia's contribution to global economic growth?

Yi Xiong: I mentioned the US and China earlier, but, we should consider China within the broader framework of Asia, as Asia remains the most significant source of growth for the global economy. Last year, Asia contributed approximately two-thirds of global economic growth, with nearly half of this, about 30%, coming from China alone. So, China remains a crucial driver of global economic growth.

Meanwhile, Asia as a whole also contributes substantially to economic growth. This includes India, where economic growth has been relatively high, and Southeast Asia, which maintains a moderate to high growth rate. Even Japan, after a prolonged period of economic stagnation, has shown signs of improvement recently, both in terms of prices and the overall economy. Therefore, Asia collectively demonstrates significant economic resilience, indicating that Asia is likely to continue making substantial contributions to global economic growth.

Why can Asia achieve such impressive performance? I believe the competitiveness of the Asian economy has always been quite evident. At similar income levels, Asian supply chains and companies are among the most efficient and competitive globally. This is a critical reason for Asia's economic growth.

Looking ahead, with rising income levels across the Asian economies and increasing demand for improved living standards, Asian consumers may also play a more substantial role in driving global consumption, which could be a new highlight of future economic growth in Asia.

SFC Markets and Finance: In your opinion, which sectors will be the primary drivers of global economic growth?

Yi Xiong: From the consumer's perspective, the level of income inequality worldwide, or the income gap between developed and developing countries, has actually been narrowing over the past few decades. We now say that inequality is a big issue, but if we look at it on a global scale, in fact, global income inequality has been continuously decreasing. The trend in the past decades is likely to continue in the future.

So, I think the first important driver of global economic growth is the narrowing of income gaps, which will maintain high-speed economic development of developing countries and the growth of consumption, which can become an important source of growth for the world economy. Not only Asia, but some countries in the Middle East and even Africa have also achieved good economic growth over the past decade. So, I think this is the first source of global economic growth.

As for the second source, from the perspective of technology and productivity, we have indeed seen a lot of changes in the field of technology in the past few years. Here, I think one source is the energy revolution.

The transformation of the energy source, from fossil fuels to green energy, has just begun. There is still a vast room for development here, and such a transformation can increase the growth potential of the world economy. After all, compared to the limited fossil fuels, green energy has an unlimited supply, and with the advancement of technology, its cost is also further decreasing.

The second relatively new field is the rapid development of artificial intelligence, which is what we have seen, especially since last year. Our view is that artificial intelligence may be very crucial in the next five to ten years, which will profoundly influence the technology development in many industries.

Although it is still in its infancy now, and its applications are still pending implementation, it is likely that the applications of AI would gradually become apparent with the further development of artificial intelligence. It could drive the development, not only in developing countries, but also globally in terms of productivity. So, I think these two aspects are the most important points for future global economic growth.

SFC Markets and Finance: In your view, what role do you foresee China playing in these sectors?

Yi Xiong: I think first, it is very difficult to predict the future, but if we look at the performances in the past, in the field of green energy, it could be said that China has been catching up and surpassing others. China might have started a bit late, but after the development in the past decade, in many fields of green energy, China has already reached the forefront of the world. Therefore, I believe the role China plays in this field will be very important over the next 10 to 20 years and may even be relatively decisive.

In terms of artificial intelligence, so far, the most important innovations mainly come from the United States, but we also see that in the field of artificial intelligence, China is in a relatively leading position among all the followers. Many Chinese companies are also increasing their investments in AI and they have made huge progress.

If we look at the human resources in the field of artificial intelligence, interesting surveys found that the proportion of Chinese in this field is high, and it might be the highest in the world. So, if we can attract enough talents and continue to invest in this field, I believe China will also perform well in this field.

策划：于晓娜

监制：施诗

责任编辑：李依农

记者：李依农

制作：李群

新媒体统筹：丁青云 曾婷芳 赖禧 曾昭发

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