China Economic Outlook: Tracking the Post-reopening Growth Rebound
China’s economic growth is expected to rebound in 2023 after the country lifted its previously strict COVID policies and the government gave a renewed push to spur growth. During the recent National People’s Congress (NPC) meeting, China unveiled its 2023 GDP growth target of “around 5%”, indicating an expectation of a recovery from 3% growth in 2022.
Domestic consumption is expected to drive China’s economic recovery this year after being a latent drag on growth for most of 2022 (see Figure 1). As we pointed out in our January economic update, Chinese household savings have risen sharply over the past two years, suggesting that considerable pent-up demand could be unleashed. Moreover, the recent Central Economic Work Conference (CEWC) also mentioned boosting consumption as a key focus for 2023.
Recent economic readings are showing tentative signs of a rebound in private consumption. For example, consumer sentiment, which had fallen sharply in April 2022 following major waves of COVID and lockdowns, has shown a preliminary uptick since December 2022 (see Figure 2).
The services purchasing managers’ index (PMI) survey (see Figure 3) showed a sharp expansion in activity in January and February this year. In particular, domestic and international tourism bounced back as travel restrictions were lifted. According to data from the National Tax Administration[1], sales revenues during China’s Lunar New Year (LNY) holidays were up 12.4% compared to the same period in 2019. Sales revenues of travel agencies and related services surged 130% year-on-year and were 80.7% of the level during the 2019 LNY.
The strength of the consumption recovery will depend on progress in employment, income growth and sentiment around job security and government support.
Unemployment data for January 2023 suggests that the labour market is stabilising. The youth unemployment rate has eased from a high of 20% in July 2022 to 17% in January this year, and overall unemployment rate of major cities has retreated from a recent peak of 6.9% in May 2022 to 5.8% in Jan 2023 (see Figure 4).
While these are positive signs, it may still take some time for employment and disposable incomes to return to (see Figure 5). This would particularly be the case when manufacturing is facing slower overseas demand and investment, such as in the current environment.
The NPC’s emphasis this year on increasing urban and rural incomes may mean that measures such as tax breaks or consumption coupons might be considered to invigorate consumption, while shoring up funding and support for smaller businesses will remain a key government objective to sustain employment recovery.
Turning to factory gate prices, PPI has been in deflation since October 2022, symptomatic of the declining commodity prices globally as well as softening external demand, a trend that may continue through 2023.
We expect CPI inflation to gradually pick-up through the year as consumer demand improves and labour markets and wages stabilise. In addition, more active monetary policy support for the economy should also help reinvigorate demand. On 17 March, the People’s Bank of China announced a 25 basis points cut in the reserve requirement ratio for financial institutions, after already announcing an increase in fund injections, via medium term lending facility, on 15 March.
With CPI inflation falling significantly short of the government’s target of 3% for this year, we expect monetary policy easing to continue through the rest of 2023, in order to support growth and prices.
As a result, housing sales and prices have started to stabilise (see Figure 7). Official data showed that new home prices steadied in January 2023 (to a marginal increase of 0.1% month-on-month), ending a 16-month decline[3], while contraction in secondary market prices has also narrowed. For January and February combined, data from the China Real Estate Information Corp showed that sales accrued by the top 100 builders improved to -11.6% year-on-year; while sales in February were up 15%. Secondary market transaction volume in top-tier cities has rebounded. However, despite signs of stability, the pace of recovery has remained sluggish and uneven.
Systemic risks for the sector have reduced, but credit is likely to remain constrained as the government remains wary of excess leverage in the sector; whilst property sales also hinge on a recovery in broader consumer sentiment. Overall, barring additional policy support, the real estate sector is likely to see only a mild recovery this year rather than being a major driver for GDP growth.
Manufacturing PMI survey data for January and February point to an expansion in activity and new export orders. However, we believe that manufacturing investment growth would likely slow this year amidst softening external demand, a tech sector slowdown and lingering concerns over a recession in advanced markets in the later part of 2023.
China’s export growth has already flipped into contraction since October 2022 (see Figure 8). Moreover, ongoing geopolitical headwinds are likely to constrain foreign investment in manufacturing as well as overseas demand for goods, particularly in the technology sector.
The 2023 government work report pledged policy support for core manufacturing such as high-tech manufacturing, investment in modernisation of industrial chains and digitisation, which could offset some of the drag from softening external demand.
The government’s target of “around 5%” GDP growth, softening external demand, and only a moderate expansion in the fiscal deficit target suggest that private consumption is expected to be the key driver for China’s growth recovery this year. Early indicators are pointing to an uptick in consumption, particularly in services, while discretionary consumer goods spending, consumer prices as well as housing demand may recover more gradually as employment and income levels improve. At a time when external demand is expected to slow, and geopolitical risks are rising, boosting China’s internal consumption engine will be essential to reducing risks for the economy, while also aligning with the policy of “dual circulation” for China’s economic growth.
[1] State Taxation Administration of the People’s Republic of China: http://www.chinatax.gov.cn/eng/c101269/c5183822/content.html
[2] https://npcobserver.com/wp-content/uploads/2023/03/2023-Government-Work-Report.pdf
[3] The Standard, 17 February 2023. https://www.thestandard.com.hk/section-news/section/2/249894/China’s-home-prices-steady-after-stimulus
Domestic consumption takes the driver’s seat
Domestic consumption is expected to drive China’s economic recovery this year after being a latent drag on growth for most of 2022 (see Figure 1). As we pointed out in our January economic update, Chinese household savings have risen sharply over the past two years, suggesting that considerable pent-up demand could be unleashed. Moreover, the recent Central Economic Work Conference (CEWC) also mentioned boosting consumption as a key focus for 2023.Recent economic readings are showing tentative signs of a rebound in private consumption. For example, consumer sentiment, which had fallen sharply in April 2022 following major waves of COVID and lockdowns, has shown a preliminary uptick since December 2022 (see Figure 2).
|
|
 |
|
Source: CEIC, NBS |
Source: CEIC, NBS |
Services sectors are seeing an early rebound
The ongoing consumption recovery, however, is gradual and uneven, with services demand recovering faster than demand for discretionary consumer goods, such as household retail purchases and passenger cars.The services purchasing managers’ index (PMI) survey (see Figure 3) showed a sharp expansion in activity in January and February this year. In particular, domestic and international tourism bounced back as travel restrictions were lifted. According to data from the National Tax Administration[1], sales revenues during China’s Lunar New Year (LNY) holidays were up 12.4% compared to the same period in 2019. Sales revenues of travel agencies and related services surged 130% year-on-year and were 80.7% of the level during the 2019 LNY.
Improvement in employment and income needed to sustain consumption
The strength of the consumption recovery will depend on progress in employment, income growth and sentiment around job security and government support.Unemployment data for January 2023 suggests that the labour market is stabilising. The youth unemployment rate has eased from a high of 20% in July 2022 to 17% in January this year, and overall unemployment rate of major cities has retreated from a recent peak of 6.9% in May 2022 to 5.8% in Jan 2023 (see Figure 4).
While these are positive signs, it may still take some time for employment and disposable incomes to return to (see Figure 5). This would particularly be the case when manufacturing is facing slower overseas demand and investment, such as in the current environment.
The NPC’s emphasis this year on increasing urban and rural incomes may mean that measures such as tax breaks or consumption coupons might be considered to invigorate consumption, while shoring up funding and support for smaller businesses will remain a key government objective to sustain employment recovery.
|
|
 |
|
Source: CEIC |
Source: CEIC, NBS |
Decline in consumer prices prompt monetary policy action
CPI inflation decelerated to 1% in February from 2.1% in January (see Figure 6). While the timing of the LNY could have an impact on the monthly figures, a decline in food prices, particularly pork prices, helped to lower headline inflation tangibly. Nonetheless, prices excluding food and energy (i.e. core inflation) also declined marginally, reflecting still anaemic consumer demand across most categories of goods.Turning to factory gate prices, PPI has been in deflation since October 2022, symptomatic of the declining commodity prices globally as well as softening external demand, a trend that may continue through 2023.
We expect CPI inflation to gradually pick-up through the year as consumer demand improves and labour markets and wages stabilise. In addition, more active monetary policy support for the economy should also help reinvigorate demand. On 17 March, the People’s Bank of China announced a 25 basis points cut in the reserve requirement ratio for financial institutions, after already announcing an increase in fund injections, via medium term lending facility, on 15 March.
With CPI inflation falling significantly short of the government’s target of 3% for this year, we expect monetary policy easing to continue through the rest of 2023, in order to support growth and prices.
|
|
 |
|
Source: CEIC, NBS |
Source: CEIC, NBS |
Property market is showing signs of stabilisation
Other than slower consumption demand, sluggishness in the property market was another major growth headwind for China in 2022. The Government Work Report[2] addressed the systemic risk the property market poses for the country’s economy and the need to stabilise this market. Late last year, the government announced 16 policy measures to ease funding for housing developers and to lift housing demand. Additional measures have been taken by local governments to boost demand, such as lowering mortgage rates and easing home purchase restrictions.As a result, housing sales and prices have started to stabilise (see Figure 7). Official data showed that new home prices steadied in January 2023 (to a marginal increase of 0.1% month-on-month), ending a 16-month decline[3], while contraction in secondary market prices has also narrowed. For January and February combined, data from the China Real Estate Information Corp showed that sales accrued by the top 100 builders improved to -11.6% year-on-year; while sales in February were up 15%. Secondary market transaction volume in top-tier cities has rebounded. However, despite signs of stability, the pace of recovery has remained sluggish and uneven.
Systemic risks for the sector have reduced, but credit is likely to remain constrained as the government remains wary of excess leverage in the sector; whilst property sales also hinge on a recovery in broader consumer sentiment. Overall, barring additional policy support, the real estate sector is likely to see only a mild recovery this year rather than being a major driver for GDP growth.
Manufacturing sentiment is strong, but likely to be weighed down by slowing external demand
Manufacturing PMI survey data for January and February point to an expansion in activity and new export orders. However, we believe that manufacturing investment growth would likely slow this year amidst softening external demand, a tech sector slowdown and lingering concerns over a recession in advanced markets in the later part of 2023.China’s export growth has already flipped into contraction since October 2022 (see Figure 8). Moreover, ongoing geopolitical headwinds are likely to constrain foreign investment in manufacturing as well as overseas demand for goods, particularly in the technology sector.
The 2023 government work report pledged policy support for core manufacturing such as high-tech manufacturing, investment in modernisation of industrial chains and digitisation, which could offset some of the drag from softening external demand.
|
|
 |
|
Source: CEIC, NBS |
Source: CEIC, General Administration of Customs |
Infrastructure investment likely to be more targeted
Government policy on infrastructure has been geared towards reducing the number of inefficient projects. Moreover, the fiscal deficit targets for 2023 have widened only moderately from last year’s (3% budget deficit target and special local government bond quota of CNY3.8 trillion). Local governments are also under fiscal pressure from declining land sales revenues and reduced financing through local government financing vehicles which are facing a credit crunch. These factors will likely keep government infrastructure investment more targeted towards strategic areas rather than providing broad-based support for economic growth.
Summary
The government’s target of “around 5%” GDP growth, softening external demand, and only a moderate expansion in the fiscal deficit target suggest that private consumption is expected to be the key driver for China’s growth recovery this year. Early indicators are pointing to an uptick in consumption, particularly in services, while discretionary consumer goods spending, consumer prices as well as housing demand may recover more gradually as employment and income levels improve. At a time when external demand is expected to slow, and geopolitical risks are rising, boosting China’s internal consumption engine will be essential to reducing risks for the economy, while also aligning with the policy of “dual circulation” for China’s economic growth.
[1] State Taxation Administration of the People’s Republic of China: http://www.chinatax.gov.cn/eng/c101269/c5183822/content.html
[2] https://npcobserver.com/wp-content/uploads/2023/03/2023-Government-Work-Report.pdf
[3] The Standard, 17 February 2023. https://www.thestandard.com.hk/section-news/section/2/249894/China’s-home-prices-steady-after-stimulus
