Xi Jinping acknowledges the challenges faced by Chinese businesses in his new year message.

Recovery of the second-largest economy in the world is being hindered by a severe decline in property values and lackluster global demand. In his new year’s message, China’s president, Xi Jinping, acknowledged that some businesses faced difficulties in 2023, with new data showing a further weakening in factory production this month. However, he pledged to increase the pace of the economy’s recovery.

During a television address, Xi stated, “During our journey, we are bound to come across challenges. Some businesses faced tough times. Some individuals struggled to find employment and meet their basic needs.”

The sluggish recovery of the world’s second-largest economy is impacted by a severe slump in the property market, weak global demand, and a record level of youth unemployment. Evergrande, once China’s largest developer, is undergoing a painful debt restructuring process, while Country Garden, its main competitor, defaulted in October.

China’s factory activity contracted more than expected in December due to a decline in new orders. These worse-than-expected figures have increased expectations of new stimulus measures in the upcoming year, clouding the economic outlook.

Xi stated that China will “consolidate and strengthen the positive trend of economic recovery and achieve stable and long-term economic development.” He emphasized the need for comprehensive reform and opening up.

The authorities have taken measures to suppress negative commentary in order to boost public confidence.

In December, China’s official manufacturing purchasing managers’ index (PMI), a closely monitored survey, fell to 49, below the 50 mark that signifies contraction. This marked the third consecutive month of decline and the weakest reading since June. New orders were the main contributing factor to the decline, with a reading of 48.7, while export new orders also worsened with a reading of 45.8. Production, though still in expansion territory, decreased slightly to 50.2.

An economist at Hwabao Trust, Nie Wen, stated, “We must increase policy support, or else the trend of slowing growth will persist.” Wen expects the central bank to lower interest rates and banks’ reserve requirement ratios in the coming weeks, as falling prices have greatly impacted company profits and affected employment and income.

China’s central bank announced plans to implement measures to support the economy and encourage an increase in prices. Chinese leaders also pledged to take additional steps in the upcoming year to guide the economic course for 2024.

Kevin Lam, senior China+ economist at Pantheon Macroeconomics, stated, “Currently, the impact of recent fiscal stimulus has yet to be fully realized in the economy. We still haven’t seen the demand related to reconstruction filtering through to the manufacturing sector.

“Externally, demand conditions from China’s key trading partners – the US and EU – are expected to be sluggish in the near term due to high interest rates prevailing in those economies. This will further impede manufacturing production in China…We anticipate China will continue to rely on fiscal policies, primarily through fixed asset investment, to stabilize growth, but we don’t expect the type of aggressive stimulus seen during the global financial crisis.”

In December, China’s non-manufacturing PMI, which includes services and construction, indicated a modest expansion with a reading of 50.4. The construction index rose to 56.9 in December as many companies rushed to complete construction projects before the lunar new year in February.

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