Macro – China

Is the worst now behind China?

13 November 2023

After hopes were dashed of a strong bounce in Chinese growth following the conclusion of COVID-19 restrictions, is the gloom surrounding the country’s prospects now really justified?

By Julien Lafargue, CFA, London UK, Chief Market Strategist

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

The Chinese economy is on track to grow by just 5.1% in 2023. While this is still better than last year’s 3.0% expansion, it is lower than the bounce most economists expected after the country ended its “zero COVID” policies around 12 months ago.

The country faces headwinds. First, as an exports-driven economy, the combination of slow growth in the developed world along with trade tensions in some of its largest markets, have been a drag on the manufacturing sector. Second, the domestic real estate sector is still struggling to recover from its recent troubles and is in dire need of a profound restructuring. Finally, Chinese consumers are suffering a typical “balance sheet recession”, as their main focus is to reduce debt rather than to take on more of it. 

In this context, the government’s limited stimulus measures offered during 2023 have been of little help to growth. A much larger fiscal boost would be required to significantly increase output. That said, every initiative helps, and although a sharp reacceleration in the economy remains unlikely, China’s weak economic momentum appears to have troughed.

Another challenging year ahead?

With so much relying on central and local governments’ willingness and ability to support the economy, visibility remains limited. With no clear plans to unleash a large fiscal package and the persisting drag on growth from the deleveraging process, Chinese economic growth will likely remain subdued in 2024, at around 4%.

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

  2022 2023F 2024F
GDP growth 3.0 5.1 4.0
CPI inflation 2.0 0.5 1.6
Unemployment rate 5.4 5.3 5.2
Consumption 1.0 4.2 3.0

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

However, in the same way that the nation disappointed in 2023, it could surprise positively next year. After such optimism twelve months ago, the almost-unanimous cautiousness among economists over the outlook for China is perhaps the main factor playing in favour of such a scenario.  

Whether it is from a cyclical (ie: real estate hangover, elevated public debt levels or subdued consumption) or structural (ie: ageing population, more disconnected world) stand point, almost everybody appears pessimistic about the country’s prospects.

Inflation to rebound gradually 

At least the nation doesn’t have to worry about inflation. Unlike most of the developed world, domestic price pressures have been minimal in 2023. In fact, the country briefly experienced headline deflation in July, as shown in our September article ‘Chinese deflation may be a blessing in disguise’. 

With food representing about a third of the Chinese headline consumer price index (CPI) basket, items like pork prices tend to be key drivers of inflation. Similarly, housing costs (30% weighting) have been muted in 2023, although they have started to pick up recently. Lastly, with plenty of slack in the labour market, wage pressures have been largely non-existent. 

With this year’s weak inflation data coming into play as base effects through 2024, headline CPI is likely to pick up and could average 1.6% next year. Importantly, there doesn’t seem to be an impediment to further fiscal and/or monetary stimulus.

Chaos creates opportunities 

China’s recovery will likely be uneven and the short-term outlook remains as challenging as it is uncertain. Similarly, geopolitical developments remain a wild card and can explode into life quickly, as seen with events in the Middle East in October. Furthermore, there is no reason to expect a significant improvement in Sino-American relations. 

However, the lack of inflationary pressures should allow the People’s Bank of China to keep monetary policy accommodative in 2024. Additionally, domestic authorities remain laser-focused on their long-term objective of “Common Prosperity”, the Chinese Communist Party’s goal to raise incomes for the worst off, promote fairness, make regional development more balanced and focus on people-centred growth. 

As such, we believe the stars are aligned for the country to accelerate the structural reforms needed to address drags on growth, helping the economy to rebalance and in turn opening up fresh opportunities for investors.

Outlook 2024

What’s in store for investors in 2024? Despite lingering uncertainty and volatility, find out why it’s not all doom and gloom.