SFC Markets and Finance | Alicia García Herrero: China will achieve its around 5% growth target

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 fives months of 2024, showing its strong growth momentum. As the 20th Communist Party of China Central Committee is set to meet at its third plenary session in July, known as the Third Plenum, people are keenly awaiting developments to see how this will further reshape the Chinese economy and stock market. Despite challenges and uncertainties, how will China's economy perform this year? At the mid-year, Chief economists and chief investors from financial institutions will share their insights to SFC Markets and Finance's "Chief's View on China".

南方财经全媒体记者施诗 上海报道

At the start of the year, most forecasters anticipated the Fed would cut rates several times. However, The Federal Reserve held interest rates steady. It seems economy performed stronger than expectations. So will the Fed cut rates in the rest of year? How will the U. S. elections affect the world? Will China achieve its goal? We’re inviting Alicia García Herrero, the chief economist for Asia Pacific at Natixis, to join our discussion.  

SFC Markets and Finance: As we are at the mid-year, would you like to go over the performance of the global economy in the first half year of 2024?

Alicia García Herrero: Well, I would say that so far so good. The American economy has remained quite strong. It is decelerating, but I think, not as fast as many expected. So I would call this "soft landing" so far, especially if the Fed starts cutting rates in September. Our goal is to cut still, to cut September and December, in which case we think the US economy could grow around between two and one and a half. So it's quite a good "soft landing". The European economy is growing slightly faster than last year. So it might end up the year with 0.8 or 1%. And China will probably achieve the 5% growth target. So it is kind of a good 2024.

SFC Markets and Finance: You mentioned the Fed may begin to cut rates in September. But the ECB cut rates for the first time in nearly five years in early June. So what's the logic behind these different decisions?

Alicia García Herrero: It's a good question. You're right, because I just said that the European economy is growing more than last year, so why cut rates? The reason is very simple. Disinflation in Europe is very fast, much faster than in the US. So the inflation will, basically headline, is already at target, or will very soon be at target. So it's because of the successful disinflation process.

SFC Markets and Finance: If the Fed begins to cut rates in September, how many times will the Fed cut rates in the mid-term?

Alicia García Herrero: Twice, September and December. And many more times next year, maybe four more times. So it's going to be quite good for the economy and for the new president. We don't know who that person will be, but the Fed will be indeed cutting rates. But of course, this is also because of disinflation. We expect disinflation to continue in the US. If this were not the case, then things could be very different.

SFC Markets and Finance: How will the Fed's rate cuts influence the global economy? 

Alicia García Herrero: Positively. China will be a big beneficiary also, because, as you know, there's been a lot of outflows because of the interest rate differential being positive for the US. This is true for Europe also. So, you know, I think this will help. Especially put it this way. I mean, Europe and China don't necessarily need so much capital because they have current account surpluses. But some countries in the emerging world and frontier markets need capital. So if the Fed cuts rates, there would be more capital towards those needed, especially, as I said, in countries with big financing needs. So it's good news. It's good news for emerging markets. I expect emerging market assets, stock markets, etc. to perform very well.

SFC Markets and Finance: Recently, the World Bank said global growth is stabilizing for the first time in three years. What's your opinion? How will global growth change this year?

Alicia García Herrero: Well, as mentioned, I think it will be quite good. And next year it would probably be maybe even better, at least, if not better, stable, because I think the emerging world will grow faster because of lower financing costs. The US will accelerate a bit, but it will not enter recession. So I think that sentence is right, stabilization of growth.

SFC Markets and Finance: 2024 is a year full of political elections. The EU election has already surprised the market. The U.S. election may be the most important one in the rest of the year. What’s the impact of these elections on global economy?

A lot of political elections took place in the past six months. The recent one is the EU election, which the result is surprising.  So how have these elections influenced the global economy in the first half year?

Alicia García Herrero: I would say that European elections have not been so surprising. If anything, the share of parliamentarians in the far right is the same. European Parliament, I'm talking about. So I think the European Parliament elections are not the big news. I think the big news is France and Germany, where the share of far right has been higher, and especially France, because the president has decided to call for a snap election. But the results overall are not so dramatic. But yes, for these two countries, maybe they were felt to be excessively far right. And therefore, France in particular, has taken this decision. But that's all, the elections themselves are not as dramatic.

SFC Markets and Finance: Do you think how the election in France will influence China-France trade relations? 

Alicia García Herrero: Well, we don't know what's going to happen. And I also think that Macron will remain strong co-habitation, as we say. So with the far-right government, and Macron as president will make Macron's life more difficult, but Macron will remain the president. So the interest of foreign policy is fully in the hands of Macron. So I don't think it will change massively because of this. 2027 is a different story. But for that, we need to know what the far right's ideas are about France-China relations. We don't know yet.

SFC Markets and Finance: Data China maintained steady economic growth against headwinds in the first half of the 2024. Economists surveyed by Bloomberg are now saying China’s economy may expand 5% this year, up from the 4.9% projected in May, even as consumer spending slows. Looking ahead, how will China’s economy perform? Which region will drive China’s growth? So how do you think about China's economy in the first half of the year?

Alicia García Herrero: Well, I think China now, if you look at the latest data, retail sales were a bit better. So from very low, 2.2-3% something. So it's a little bit better, but still below the expected growth rate of 5%. So this means consumption is still weak. Investment is at four, which is even lower than before. Fixed asset investment is also below five. So the only thing that is growing faster than GDP growth is exports. I mean, net exports, meaning external demand. So it is very important that China stimulates consumption because otherwise, it's going to be very hard for them to achieve the goal. I think China will achieve the goal, but you want to achieve the goal feeling relaxed that next year, you can also achieve the goal. And for that, I think China needs to stimulate consumption. Indeed. 

SFC Markets and Finance: The Guangdong-Hong Kong-Macao Greater Bay Area is one of the most dynamic areas in China. How has the Greater Bay Area contributed to China's economy?

Alicia García Herrero: A lot. The Greater Bay Area is an amazing experiment for China, because it tries to replicate in a way, the Bay. And this is an innovation hub like the US has. And this is extremely important for China's long-term future, both because, as we know, China is decelerating structurally. It needs innovation to continue to grow. But most importantly, because the US, in a way, is containing China. We know that in some sectors, like semiconductors. So having a very innovative, high-end region, like the Greater Bay Area, is the way to respond. So, I think it's really important for China.

SFC Markets and Finance: How can Guangdong, Hong Kong and Macao deepen cooperation in the future?

Alicia García Herrero: Yes. I mean, cooperation is increasing, very clearly. But I think Hong Kong's role in the Greater Bay Area was to provide finance, as you know. And I think this is a bit becoming more difficult. If you look at the numbers, the number of foreign investors into Hong Kong is shrinking. So it's very important to keep Hong Kong as a very strong, rule-based, dynamic financial center. This is in the interest of the Greater Bay Area, So it is very important to keep that vibrancy of Hong Kong.

SFC Markets and Finance: Finally, would you like to give an outlook for China's economy?

Alicia García Herrero: Well, I would say that, the prediction is China will have $25,000 per capita by 2035. But in the same way, it's important to know that the growth rate by 2035, with this number is great, $25,000 per capita, the growth rate will only be 2.3%. For me, it's okay, because it's the US growth rate… No problem. But I think, in a way, and this is nothing wrong. It's, I call it the force of gravity, because this always happens in every economy, to happen in South Korea, happen in Japan. But you need to accept that. You need to know this is going to happen, to prepare. And I think this is something, I would say, that prediction is China will need to get used to lower growth. It's okay not to grow so fast, but you need to accept it, slowly but steadily. You will become richer. You have become richer, but growth will not be 6% and never again. And that's okay. 

As China is on the way to high-quality development, China’s economy may not grow as fast as before, but it will grow steadily. And China’s citizens will become richer.

（市场有风险，投资需谨慎。本节目嘉宾意见仅代表本人观点。）

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