Despite some periods of strong growth last year, investors in the Chinese economy faced serious obstacles and tensions in relations with the United States.
"We believe that property stabilization, a way out of deflation, and improved policy and communication are necessary to restore trust. Incentives are also needed and reforms are welcome," Citi analysts told CNBC. "The risk is that markets may not be ready to wait for reforms."
This uncertainty persists into early 2024. The country is moving towards lower growth rates after double-digit figures of the past decades.
These are the issues that CNBC believes investors are concerned about in the coming year.
Will there be an incentive?
Due to geopolitical risks, China's attractiveness as a fast-growing market is weakening.
Many were disappointed by the insufficiently rapid recovery of the country's economy after the lifting of covid restrictions in December 2022. With the exception of tourism and some industries such as electric vehicle manufacturing, China's economy has experienced sluggish growth, real estate problems and a decline in exports for most of 2023.
Last year, several international investment banks changed their forecasts for China's economic growth several times. It is now expected to grow by about 5%.
Citi analysts expect that as early as January, the People's Bank of China may reduce rates, for example, the reserve requirement ratio - the amount of funds that creditors must hold as reserves. Experts also predict that Chinese GDP will grow by 4.6% this year.
In mid-December, the Chinese authorities held an annual meeting to discuss economic policy for the coming year. They have not officially announced significant plans to stimulate the economy, but technological innovation has been noted as one of the priorities.
During the upcoming parliamentary meeting, which will be held in early March, Beijing plans to set detailed economic goals for the country. However, it remains to be seen whether China will boost economic growth in the same way it has done before.
"I think China is not going to provide significant incentives," Liqian Ren, head of quantitative investment at WisdomTree, said in late November. According to her, even if China presents a good package of measures, many of these incentives will be limited by the overall increase in China's economic growth rate, which the authorities are targeting.
What will happen to the real estate market?
Real estate is a prime example of a sector growing due to debt. At the same time, it accounts for about a quarter of China's economy. The real estate market in China fell sharply after Beijing began to struggle with the high debt burden of developers in 2020. The industry's close ties to local government finances, construction supply chains and household mortgages have raised concerns about the impact on the country's economy as a whole.
"The real estate downturn in China has become the biggest burden on its economy since breaking out of covid restrictions at the end of 2022," Goldman Sachs analysts said in a January 2 report. According to their estimates, real estate sales and construction fell sharply in 2021-2022 and continued to decline in 2023.
According to data from the National Bureau of Statistics, available through Wind Information, sales of commercial housing in 2023 as of November fell by 5.2% compared to the same period last year. In 2022, they collapsed by 26.7%.
Ding Wenjie, global investment strategist at China Asset Management Co, expects government support to increase in 2024 as the Chinese government has moved from risk aversion to making progress while striving to maintain stability.
Where are the prospects?
Although it is obvious that Beijing would like to reduce the contribution of the real estate sector to China's GDP, it is unknown whether new growth drivers will be able to fill this vacuum.
According to Citi analysts, in 2020, mechanical engineering, electronics, transportation equipment and batteries accounted for 17.2% of China's economy. This means that these areas of production can compensate for the drop in demand for real estate, analysts believe. However, they noted that the economic transition cannot happen overnight, as it requires addressing the skills gap in the labor market and adjusting the supply chains that have been built for real estate development.
Despite the economic problems, Beijing has made it clear that it wants to support domestic technology and advanced manufacturing.
Ding from China AMC believes that the high-tech manufacturing sub-sectors can benefit this year due to the rise of the global technology cycle. For example, consumer electronics and computers are promising. She also expects producer prices in China to return to growth at the end of the second quarter, leading to an increase in corporate earnings per share of about 8-10%.
