SFC Markets and Finance | Raymond Yeung: China's economy is expected to reach $18.5 trillion in 2024

Editor's note:

After over 40 years' booming, is China's economy collapsing? The recent data gave the answer. China's economy grew faster than expected in the first five 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

The year 2024 has passed halfway. In the past six months, despite a complex and changing external environment, China's economy has remained stable and improved fundamentally.

Recently, international organizations raised their expectations for China's economic growth, which shows China's strong adaptability and stress resistance, and gaining international recognition for China's economic recovery.

Looking ahead to the second half, how will China's economy perform? How will the Greater Bay Area help China achieve high-quality development? Globally, what impacts will the Federal Reserve rate cut have on the economy? Today we have invited Raymond Yeung, Chief Economist, Greater China, Australia and New Zealand Banking Group, to join our discussion. 

SFC Markets and Finance: At the mid-year, I would like to start by asking you to review the global economic performance over the past six months. What surprises and unexpected events have occurred?

Raymond Yeung: 2024 can be considered a turning point in the global economic cycle. In the first half of the year, we clearly saw a recovery trend in China's data, with the economy gaining momentum, particularly driven by exports. This, to some extent, reflects relatively good demand in Western economies, especially the United States.

We can foresee two significant changes in the second half of the year. The first change is in the global economic situation. The strong export momentum observed in the first half of the year might start to slow down in the second half. The domestic economic data from the United States has begun to show signs of weakness. Although it is not extremely weak, data from May is relatively soft compared to previous months, possibly indicating a downward trend. For the second half of the year, we need to be mentally prepared for the possibility that the slowdown in the US might be faster than we anticipated. This is the first thing to be noticed.

The second possible change is related to the US economy, which is a major driver of global demand. Its slowdown will also impact the Federal Reserve's interest rate decisions. This year, a key question for financial markets is whether the US will cut interest rates. The US dollar remains very strong. Will other central banks follow the US in cutting interest rates? Currently, US inflation has clearly slowed down over the past 2-3 months. We estimate that there might be a rate cut in the second half of the year, with at least a 25-basis-point reduction. If the inflation data for June and July shows a faster decline, we might even see a 50-basis-point rate cut in the US this year. This is something we need to closely monitor in the second half of the year. After all, the U.S. dollar interest rate has a great influence on global finance.

SFC Markets and Finance: According to the latest Global Economic Prospects report, the World Bank has raised its forecast of the global economy from 2.4% in January to 2.6% for this year. What is your view on this adjustment? Which countries and regions will be the main drivers of global economic growth this year?

Raymond Yeung: The World Bank's report should be viewed in two parts. The first part focuses on the upward revision of the global economic growth rate with the main sources being the United States. The report raises the US economic growth rate for 2024 by 0.9% indicating relatively good economic performance. Additionally, it also raises China's economic growth rate by 0.3%. The World Bank now forecasts China's economic growth to be 4.8% this year, which is close to our bank's own projection of 4.9%, nearing the 5% growth target. This is the first notable point in the World Bank's report.

Given the significant economic scale of these two economies, particularly China's economy which is expected to reach a total of $18.5 trillion this year and the US economy is close to $29 trillion. Any upward adjustment in their growth rates has a substantial impact on the World Bank's report of the overall global economic growth outlook for the year.

However, another particularly noteworthy economy in the report is India. The World Bank forecasts India's GDP growth rate to be 6.6% this year, and last year we know India's economic growth rate was over 8%. Therefore, maintaining a growth rate above 6%, potentially even 6.5% this year, is remarkable. Although India's overall economic scale is not yet very large, not having reached a $4 trillion economic total, its economic growth rate performance is outstanding and worth our attention. In addition to the traditional economic growth engines like the US and China, many other economies are also performing very well. From an international investment perspective, they have attracted significant attention, with many people focusing on these economies' development this year and in the next 2-3 years.

SFC Markets and Finance: You mentioned that the US economy is still in a relatively good state, which may be one reason why the Fed has not yet cut interest rates. However, the European Central Bank and the Bank of Canada started to cut interest rates, while the Bank of Japan has started to raise interest rates. What is your view on the current diverse global monetary policies? If the Federal Reserve begins to cut interest rates, what impact will it have on emerging markets? 

Raymond Yeung: Even though their central banks are undergoing monetary policy divergence, I think they are all moving towards monetary policy normalization. Especially in the United States, over the past two and a half years, the Federal Reserve has been committed to controlling inflation. Now, with the inflation rate gradually decreasing, for example, core CPI or core PCE inflation rates have fallen below 3%, the market has begun to conditionally discuss and study the possibility of interest rate cuts. This can also be seen as a form of monetary policy normalization. The European Central Bank started cutting interest rates earlier than the United States, which is also a step towards monetary policy normalization.

The Bank of Japan is similarly moving towards monetary policy normalization. Although it has chosen to raise interest rates, this is also a shift from the unlimited quantitative easing state of the past decade or two. Japan has begun to feel inflationary pressures and price increases, something that hasn't happened in the past 20 years.

Of course, Japan did impose a consumption tax 10 years ago, temporarily increasing inflationary pressures, but overall, it wasn't genuine inflation. The return of inflation has forced the Bank of Japan to raise interest rates. Moreover, the Bank of Japan's rate hikes and termination of negative interest rate policies have been relatively moderate. In the recent Bank of Japan meetings, they have started discussing and studying the possibility of reducing the balance sheet.

From these actions, we believe this is a process of normalizing interest rates and monetary policy, rather than a significant shift in their monetary policy thinking. Comparatively, two central banks are adopting rate cut policies, and one central bank is adopting a moderate rate hike policy. Overall, they are all moving towards the normalization of monetary policy.

Theoretically, if the US cuts interest rates, it can directly reduce the pressure on currency depreciation for many emerging markets and countries in the Asia-Pacific region. This is the most direct result of our analysis. Particularly, many Asian economies might have been hesitant over the past 12 months about whether there would be an opportunity to cut interest rates, as their domestic economies have not been particularly strong, and have had to rely on government support to sustain economic operations. In terms of exports, the import and export data has improved somewhat in recent months. In the first half of the year, particularly China's export data, showed relative stability and signs of recovery. In this context, if the Federal Reserve starts to cut interest rates, it can not only reduce the depreciation pressure on the RMB and the currencies of many countries in the Asia-Pacific region allowing them to breathe a sigh of relief, but also provide other central banks with greater flexibility to adjust their own interest rate policies more freely.

Cutting interest rates could be one of the options, though this needs to be adjusted appropriately based on the inflation pressures each country is facing. So, in this context, if the US can indeed enter an interest rate cut cycle in the second half of the year, it will be good news for many emerging markets and Asian countries.

SFC Markets and Finance: Let's delve deeper into the exchange rate issue, recently the renminbi has fluctuated downwards against the US dollar, on June 27th, the offshore renminbi against the US dollar broke the 7.3 mark for the first time in seven months. What signals could be found in the fluctuating exchange rate?

Raymond Yeung: Certainly, we have observed significant depreciation pressure on the renminbi over the past few months. We have noticed that there has been about a 2% depreciation gap between the PBOC's midpoint fixing and the market rate, which seems to have reached its upper limit for depreciation. In the past few days, the PBOC or the market has gradually adjusted the midpoint fixing upward. We previously thought 7.10 was an important threshold that couldn't be breached, with the rate staying around 7.09. However, recently it has broken through 7.10, reaching 7.11, and even touching 7.12 this week. By slowly adjusting the midpoint fixing, the market theoretically can gradually accept this, narrowing the gap between the midpoint and the actual market rate.

After all, the previous situation was not very healthy, and now there seems to be a gradual release of depreciation pressure to avoid accumulating too much downward pressure, as releasing it all at once could have larger impacts. I think the PBOC's strategy is quite straightforward, aiming to maintain the basic stability of the renminbi while increasing its exchange rate flexibility. This approach also encourages market-oriented pricing as much as possible. 

In fact, if it's not necessary, especially if the Federal Reserve begins to cut interest rates in the second half of the year, particularly in September the pressure for renminbi depreciation may significantly decrease by then. Currently, we can see that the midpoint fixing is deliberately kept below actual market rate,but this situation may improve in the second half of the year. 

SFC Markets and Finance: Can investors expect these foreign capitals to flow into A-shares and Hong Kong stock markets?

Raymond Yeung: I believe that from the perspective of global capital allocation, we must adopt a new concept. In the past, our assessments were often based on national or economies entity thinking. However, when observing global economic developments today, investors should focus on industries and enterprises. Particularly in the United States, despite potential economic slowdown and possible interest rate cuts by the Federal Reserve, the impact of sectors like artificial intelligence may reshape the entire economic structure. 

Similarly, China's focus on new industries such as new energy, photovoltaics, and numerous technological innovations demonstrates high investment potential despite a relatively sluggish macroeconomic backdrop. It's evident that international investors' perspectives may have shifted in recent times. Of course, from a pure fixed-income perspective, we primarily monitor national macroeconomic conditions. However, from a stock investment or private equity perspective, such environments often present good investment opportunities. Especially amidst structural reforms, sectors and companies with high potential and strong performance are often identified.

We are currently in the era of technological innovation, digital economy, and artificial intelligence, with China advancing the era of "AI+". This transformation spans across industries, not just IT or semiconductor sectors. Every industry may find investment opportunities in AI applications cost savings, profit enhancement, innovation, and stimulating demand through supply. Expanding these opportunities could potentially become the focus of investment in the foreseeable future rather than simply considering whether they are emerging or developing countries.

SFC Markets and Finance: Finally, let's take a look at China's economy.You just mentioned that achieving a target of around 5% for this year is feasible, what will be the main drivers？

Raymond Yeung: Certainly, we are currently observing China's economic growth approaching 5%, around 4.9%. Achievement is not without risks. This particularly geopolitical uncertainties and the impact of protectionism on China's trade exports which are significant concerns. This year especially with the U.S. presidential election both sides may use the "China card" to garner voter support. Additionally, due to the vigorous development of China's new energy vehicle industry Europe has proposed increasing tariffs on China. Therefore, in the economic and trade environment of the second half of the year, we will face numerous challenges and risks. 

However, I believe the strong support for the real estate sector, including various policy measures, to some extent, can mitigate the negative impacts by the real estate downturn in the past 1-2 years. Especially in terms of "ensuring delivery of housing", these measures have played a positive role in restoring confidence in the real estate market. In the second half of the year, although it's challenging to expect a significant recovery in real estate demand from the demand perspective, there is already a clear expectation among consumers that the state and government will continue to support stable real estate policies. This is the first part.

Secondly, we can indeed see that the current domestic economic issues are not solely about economic growth rates. Particularly with the upcoming Third Plenary Session of the 20th CPC Central Committee, the focus and emphasis will be on deepening economic structural reforms. This includes technological innovation across different industries, financial reforms, reforms in financial services to support the real economy, and long-term healthy development policies for the real estate sector. The development of real estate will be guided by the principle of "guaranteed housing as the main focus" along with market-oriented approaches. These reforms are centered around adjusting economic structures rather than blindly pursuing a 5% growth rate.

Therefore, I believe that going forward economic development and our focus in the second half of the year should primarily revolve around reforms. We need to identify and select outstanding enterprises across various industries and drive development through deepened reforms in areas such as digital economy, financial services for the real economy, technological innovation, and artificial intelligence. Additionally  environmental protection and reducing carbon emissions will also be focal points of reform. The entire economy and society will benefit from the direction of these reforms. Therefore, I believe these are the priorities we should be focusing on.

SFC Markets and Finance: You mentioned many new industries, such as technological innovation, digital economy, and green environmental protection. Could you elaborate on the development potential of these industries? 

Raymond Yeung: In China we are particularly focused on the concept of "AI+". This concept is relatively broad. Compared to the US, which primarily emphasizes AI itself, "AI+" emphasizes application across several dimensions. Firstly, there's significant investment across different industries, aiming to integrate AI into operations. This approach leverages AI applications to enhance productivity and drive intrinsic industry growth.

Secondly, within the entire "AI+" sphere, substantial investments are necessary, including in areas like big data centers and the development of large language models These investments contribute significantly to China's fixed asset investments. Additionally, talent development is crucial, because AI demands a large pool of skilled professionals. These factors collectively promise transformative changes in economic transition.

AI is still in its early stages with much infrastructure yet to be perfected, including hardware chip development and software enhancements. The evolution of large language models also demands substantial investment, and offers substantial growth opportunities. Therefore, this could become a central theme in China's future economic development, driving the growth of the digital economy.

However, in terms of application, China has the capability to leverage new developments and integrate them into its core advantageous sectors, especially manufacturing. From now until 2035, our emphasized development goal is to become a manufacturing powerhouse rather than solely advancing towards the service sector. Our focus lies in utilizing artificial intelligence and other technological innovations, including emission reduction technologies, to lower costs and enhance productivity. I believe that in the realm of application, this embodies China's unique characteristics and strengths. Therefore, I view this year as just the beginning. We should not overly fixate on whether the data in the second half of the year reflects these new developments; such a view would be shortsighted. After all, the development of these industries and the technological advancements driving overall factor productivity improvement is a lengthy process. We will also encounter various challenges along the way. 

SFC Markets and Finance: In fact, the Greater Bay Area's AI and technological innovations are developing well. So, on the path of adhering to high-quality development, what role will the Greater Bay Area play?

Raymond Yeung: The GBA is a crucial hub for the development of AI in China and holds significant importance in this regard. The concept of artificial intelligence is not new to the region. As early as 2017, Guangdong province began focusing on and promoting AI development. Initial assessments indicated that AI output from Guangdong already accounted for one-third of the national total, establishing it as a leading region in this field. We also recognize that Shenzhen has evolved into not just a national but a global hub for technological innovation. So, in this context, the Guangdong provincial government proposed some guidelines in 2022, aiming to increase the output value of artificial intelligence-related industries to around 300 billion yuan by 2025. This target represents a significant increase compared to previous years. I recall that earlier targets were around 150 billion yuan, so the current goal has doubled.

In this regard, the GBA, with Shenzhen as its primary technological hub, is poised to distribute AI applications widely across its nine cities. These cities can leverage AI in manufacturing industries, including the development of new energy vehicles and other electronic industries. Hong Kong and Macao play crucial roles in the GBA's cross-border activities, encompassing the flow of capital, talent, and data across borders. These aspects are essential for realizing the potential of the region.

Recently, one of the policy focuses has been on whether Guangdong province or the GBA can establish a concept akin to "data customs". This concept emphasizes enhancing data security while streamlining the flow of cross-border data. After all, the smooth flow of data is a critical factor in the development of digital economies, especially cross-border digital economies. Further research and better solutions in this area could highlight the distinct advantages of the GBA compared to other economic regions. Given that the GBA includes Hong Kong and Macao as development zones, finding a good solution to balance security and economic development needs in cross-border data applications could potentially become a breakthrough point in the future. 

SFC Markets and Finance: So, the integrated development of the Greater Bay Area still has a long way to go, right?

Raymond Yeung: It can be said that the Guangdong-Hong Kong-Macao Greater Bay Area, from its origins in the Pearl River Delta to its current status, has consistently been one of the most crucial regions for China's economic development. During the reform and opening-up period, Guangdong province, particularly the Pearl River Delta, played a pivotal role in integrating China into the global economy. In the current unprecedented global environment, the GBA has the potential to play a significant role internationally. It can contribute to China's engagement in the new international landscape in various ways. I believe there is a genuine need to explore new perspectives to understand how the GBA can contribute to the country in this new international context.

In recent years, China has been committed to optimizing the business environment, promoting investment, and insisting on driving high-quality development through deep reforms. As the Third Plenary Session of the 20th CPC Central Committee approaches, foreign economists await China's economic path with keen interest. As Dr. Yeung said, not emphasizing high-quality development that prioritizes speed, is more conducive to the sustainable development of China's economy. We expect more quality enterprises emerging in the fields of AI, digital economy, financial services, and technological innovation in China.

（市场有风险，投资需谨慎。本节目嘉宾意见仅代表本人观点。）

策划：于晓娜

监制：施诗

责任编辑：李依农

记者：施诗 杨雨莱 实习生李宥瑾

制作：蔡于恬

新媒体统筹：丁青云 曾婷芳 赖禧 黄达迅

海外运营监制: 黄燕淑

海外运营内容统筹: 黄子豪 

海外运营编辑：庄欢 吴婉婕 龙李华 张伟韬

出品：南方财经全媒体集团