Macro – China

Chinese wall of gloom becomes more of a boom

12 June 2023

By Henk Potts, London UK, Market Strategist EMEA

Please note: All data referenced in this article is sourced from Bloomberg unless otherwise stated, and is accurate at the time of publishing.

Key Points

  • The Chinese economy has roared back to life this year as citizens were freed from COVID-19 restrictions, even if growth was slower than some had anticipated
  • Consumers have returned to the shops in their droves and flight booking volumes have soared. However, recovery has not been broad-based, with export volumes and industrial production lagging expectations
  • Authorities have averted a liquidity crisis for property developers, but sentiment among property buyers remains weak and the sector is expected to remain a drag on growth prospects this year
  • Domestic growth is predicted to grow by almost double the expansion seen last year – driven largely by rising demand for services, stimulus measures and infrastructure investment

The Chinese economy has prospered this year, even in the absence of the broad-based boom that some forecasters had predicted. The country substantially eased its rigorous enforcement of COVID-19 restrictions towards the end of last year, which had smashed demand, caused supply shocks and weakened growth expectations.

Activity has surged as the authorities tried to stoke demand by implementing a comprehensive plan to shore up the housing market and boosted stimulus measures.

In the first three months of 2023 (Q1) the economy grew at its fastest pace for a year. Gross domestic product (GDP) expanded at a better-than-expected rate of 4.5% y/y in the quarter, up from the 2.3% seen in the last three months of 20221.

Growth was driven primarily by a surge in consumer spending and a recovery in industrial production. More recent data, however, suggests that the bounce in activity remains unbalanced and that several challenges persist.

Consumers enjoy the feel-good factor

Freed from aggressive lockdowns, consumers have started to travel once again and returned to shops and restaurants in their droves.

Data shows that services consumption is rebounding at pace, with the services purchasing managers’ index (PMI) retreating to 55.1% in April after hitting 56.9 in March2 — the highest level seen in the last year (a figure above 50 indicates growth). Hotel bookings at domestic hotels surged by almost 200% from 2019 for the Labour Day holiday3, illustrating that people are feeling more comfortable about going out. The China Air Transport Association (CATA) said aviation has recovered rapidly in the first three months of the year.

Demand for goods has shot up, aided by a 17.8 trillion yuan increase in household savings that were built up last year4. The improving labour market may have also boosted consumer sentiment. The urban jobless rate fell to 5.3% in March compared to 5.6% in February5, although wage growth and youth unemployment have yet to recover to pre-pandemic levels. 

Retail sales gathered pace in April and surged to 18.4% y/y from 10.6% y/y6 in March, in stark contrast to the 2.7% y/y decline in Q4 2022. Demand for cars continued to recover, with auto sales up by 3.4% y/y in April. Activity growth is expected to remain robust during this year, with retail sales ringing up a 9-10% advance in 2023.

Authorities fire their demand bazookas

Long term, officials have vowed to boost domestic demand as part of a “dual-circulation” development policy. They plan to do this by increasing local production, developing internal distribution and lifting national consumption levels. Domestic activity should also be stirred by incentives to increase household incomes and reduce the wealth gap between urban and rural residents. 

Spending is expected to increase as the population becomes wealthier. China’s State Council estimates that the number of people in its middle-income group will rise to 700 million in 2035, from the current 400 million figure7. In order to encourage spending, particularly among youngsters, the country will need to reduce its relatively high savings rate by improving the social security safety net. 

Two of China’s other pillars of growth have lagged the recovery in domestic consumption. Both fixed asset investment (FAI) and industrial production (IP) growth were lower than expected in Q1. The former increased 5.1%8, lower than Bloomberg’s 5.7% consensus, as property investment contracted by 5.8%8. Meanwhile, industrial output activity continues to fall behind its pre-pandemic levels, as commodities and vehicle production levels offset a fall in the production of computer equipment.

The difficult start to the year for Chinese exports continues, with purchases from the US slowing significantly. On the positive side, demand growth has been driven by soaring exports to south-east Asia, the resumption of shipments to the European Union and a doubling of purchases from Russia. 

However, exports slumped 7.5% y/y in May, given the weak growth being seen in developed economies. Furthermore, external demand could remain under pressure, with net exports forecast to shrink in 2023 and 2024.

Housing market in recovery mode

After the near collapse of the Chinese property market last year, officials have introduced a range of measures to stir demand. The initiatives include credit support for housing developers, financial assistance to ensure the successful completion of projects, and the loosening of restrictions on property purchases by home buyers.

These actions appeared to stabilise the ailing sector at the start of the year, but recent data has cast doubt of the sustainability of the improvement. Real estate investment declined 13.2% y/y in March, and property sales slumped 27% y/y in April. 

Regulators are now reportedly considering a broader range of measures, including reducing down-payments and lowering agent commissions to provide a further boost. The policies that have been implement have helped to address the liquidity crisis for property developers, but buyer sentiment still remains weak and the sector is expected to remain a drag on growth prospects this year. 

Bank lending surges

Credit growth is an essential component of China’s recovery and has rebounded this year. Banks have been encouraged to lend more, and demand from both corporates and households has improved. Bank loans surged by a better-than-expected 23% y/y in January9. Total social financing (TSF), a broad measure of credit and liquidity in the economy, accelerated to 10% y/y in April and March10.

Robust infrastructure investment has driven corporate credit demand, while the housing-market recovery has spurred mortgage demand. By contrast, bond issuance by the government and companies has slowed. The recovery in credit growth is likely to last and continue to support the economy this year.

Inflation slows almost to a standstill

While the rest of the world has been buffeted by multi-decade inflation highs, price rises in China are marginal. The country’s consumer price index (CPI) eased for a third straight month in April, slowing to just 0.1% y/y11 compared to 1% in February.

The April reading was the lowest seen since September 20214, driven by declining transportation and food costs, although improving demand pushed up services inflation. On the production side, deflation widened for a fourth straight month, with the producer price index (PPI) contracting 3.6% in April4, due to a higher base and lower energy prices.

Given the lack of price pressures, inflation is forecast to be 0.8% this year (see table), below the country’s official target level of 3%.

China economic forecasts, year on year (%, F=forecast)

Source: Barclays Investment Bank, Barclays Private Bank, June 2023

Policy response

With inflation languishing at low levels, calls have been growing for policymakers to deliver a more comprehensive policy response. We anticipate that the People’s Bank of China (PBoC) will cut policy rates by 10-20bp over the next six to nine months. Although, authorities may resist such demands over fears that they would put more pressure on its currency and lead to capital outflow.

Following the 25-basis point cut in the reserve requirement ratio (RRR) in March12, the PBoC is likely to remain accommodative, with a further 25bp cut in the RRR potentially on the cards in the second half of the year, with a trim to mortgage rates also a possibility. Such policy adjustments would supplement the PBoC’s Pledged Supplemental Lending programme and aid infrastructure investment if momentum weakens.

At the recent National People’s Congress, policymakers emphasised a range of policies that are required to drive the economy forward. These include building a modern industrial system covering electric vehicles and artificial intelligence. The authorities are also determined to expand domestic demand and enforce the support for state-owned enterprises and private companies.

The government believes that prosperity will be achieved by opening up the economy and attracting higher levels of foreign direct investment. In addition, it remains focused on defusing economic and financial risks, with the objective to resolve risks at small banks, insurers and trust companies.

Sustained economic boom in the offing

China’s faster recovery in services consumption, stimulus measures and healthy infrastructure investment should drive up growth to 5.3% this year.

Longer term, Bloomberg data suggests that China will be the top contributor to global growth over the next five years, contributing double that of the US over that period.


Mid-Year Outlook 2023

Explore our “Mid-Year Outlook”, the investment strategy update from Barclays Private Bank.