El-Erian Warns Merely Adding Fuel To China's 'Tired Growth Engine' Won't Bring Durable Prosperity: 'Needs Deeper Reform'

In response to additional evidence highlighting China’s economic slowdown, economist Mohamed El-Erian shared his insights on the challenges facing the world’s second-largest economy.

What Happened: China’s National Bureau of Statistics released official private sector activity readings for December on Sunday, revealing a worse-than-expected contraction in the manufacturing sector. The non-manufacturing sector barely expanded, with the corresponding purchasing managers’ index at 50.4, up from 50.2 in November.

A Bloomberg report on the data indicated further weakness in the Chinese economy at the end of 2023, potentially hindering recovery. The report also suggested increased pressure on the government to act urgently.

El-Erian commented on the data, stating, “Durable prosperity in #China needs more than just adding fuel to a tired #growth engine. It needs deeper reform of the growth engine itself.”

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Why It’s Important: Discussing the China outlook for 2024, Morgan Stanley’s Chief China Economist, Robin Xing, highlighted the country’s challenges, mentioning a “difficult battle against its ‘3D problems,’ namely debt, deflation, and demographics.”

Despite reflationary measures announced in July, Xing noted a gradual and bumpy reflationary journey. He anticipates the housing sector downturn and its impact on local governments to persist, requiring time to reach a new steady state.

Xing expects China to implement stronger and more coordinated fiscal, monetary, and housing easing policies to address the slowdown. He projects a modest GDP growth recovery in 2024, with real GDP edging up from 4% in 2023 to 4.2% in 2024.

Addressing the challenges of stabilizing aggregate demand amid housing and local government deleveraging, Xing sees the need for increased debt, potentially widening the government deficit by 1.5 points in 2024.

Monetary Policy: The People’s Bank of China’s Liu Shijin, a member of the monetary policy committee, noted limited scope for monetary policy easing due to a widening interest rate differential with the U.S. 

The central bank official emphasized the need for structural reforms, including demand-side reforms for migrant workers’ access to public services and supply-side reforms promoting entrepreneurship in emerging industries.

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