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Oxford Economics' lead economist shares thoughts on Chinese economy

By Ouyang Shijia | chinadaily.com.cn | Updated: 2023-10-16 11:56

Editor's note: As the Chinese economic recovery accelerates, China Daily is talking with chief economists at international financial institutions to gauge their confidence in the Chinese economy and their forecast for its operation in 2023 and beyond.

Here is the latest interview with Louise Loo, lead economist at Oxford Economics.

Louise Loo, lead economist at Oxford Economics. [Photo provided to chinadaily.com.cn]

Q: With recent measures addressing the property market downturn and boosting confidence in the capital market and the private economy, what's your outlook for the Chinese economy for the rest of the year and into 2024? Has the Chinese economy bottomed out and when may economic growth pick up?

A: We expect the economy to have reached a cyclical trough in July, and should stabilize in the coming months given the range of stimulus measures put in place. Specifically, we penciled in effective policy support to the economy amounting to 0.4 percent of GDP in H2 2023 – a smaller fiscal boost than past easing cycles.

Q: Is China entering a period of deflation and what could be the consequences? How do you see the fundamental reasons for the challenge of insufficient demand in China's economy? What would be the appropriate policy responses that can address insufficient demand without aggravating structural problems, such as debt and asset price bubbles?

A: We don't think there is enough evidence yet to suggest that China is in a period of deflation. Ultimately, authorities' most powerful and high-profile easing tools, such as a mobilization of central government balance sheet at scale or PBOC's use of the PSL (pledged supplementary lending), have yet to be deployed and could possibly be turned to as authorities attempt to put a floor to the cyclical downturn without aggravating longer-term structural problems. Structural policies that impact resource mobility issues, such as the Hukou system, could be gradually reformed to encourage overall aggregate demand.

Q: Do you think the recent preliminary signs of a property market recovery will evolve into a sustained trend? What's your projection of the property market's soft landing path going forward? How should the authorities solve the problem of property market downturn combined with local government debt pile-up without aggravating the problems in the long term?

A: Our forecast is that the housing market correction process is a much needed one, and probably still has another 2-3 years more to run. We expect the property market to undergo a "staircase-shaped" recovery, with further waves of property developer credit stresses likely. Overall, housing investments by our estimates would decline 8 percent in 2023, and decrease 1.7 percent in 2024. In terms of policies, we think ensuring credit supply to larger property developers to support housing completions could help stem a broader rout. On the demand side, stabilizing the property sector and correcting swollen housing inventories will require further policies to stimulate demand. Waiving or reducing housing-related taxes, and easing purchase restrictions for second houses could be next steps on top of the already-meaningful easing measures in place since end-August.

Q: How fast do you think China will grow in the coming decade? What are the positive factors driving China's economic development? What policies are needed to bring the potential of such positive factors into full play?

A: We expect China to grow at an average 4.0 percent over the next five years (2024-28). Measures to improve productivity are clear positive trends in the longer term, especially as authorities and businesses make further inroads in innovation and upgrading manufacturing. This is perhaps most clearly articulated in the authorities' "dual-circulation" policy, which sought to boost productivity while rebalancing economic development.

Q: There are rising discussions of whether China is about to follow Japan's path of "the lost decades" because of the common challenges facing the two economies, such as the aging population, property market downturn and potential deflation risks. What's your take on this topic? What are the differences between the current Chinese economy and the Japanese one in the 1990s?

A: Outside of the property sector, we don't think there is clear evidence that China is experiencing the same kind of balance sheet recession that Japan did prior to its "lost decade". Households and private enterprises haven't critically been forced to deleverage or repay their debts, for instance. However, that doesn't mean that the spillovers from the property correction would not be painful for the economy. Despite the different pathways, there are several similarities between China now and Japan then. These similarities include both Chinese and Japanese authorities' inclination to avoid a sharp correction in the housing market, and instead opt for a more prolonged and manageable one.

Q: Are you confident about the Chinese economy in the long run?

A: There are still very positive factors for the Chinese economy in the longer term, especially on the supply side, with very strong competitive advantages in new strategic economic sectors and renewables sectors for instance. Growth, however, will be on a slower but healthier trajectory, if the authorities can effectively manage the structural problems facing the economy – stabilizing debt, encouraging consumption, reducing systemic risks from the property sector.

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