After some hesitation, the Chinese authorities finally stepped up their stimulus measures over the summer. The recent slight upturn in economic growth is set to continue in Q4 2023. However, action by the central bank and the government remains constrained, cautious and measured, while internal and external obstacles to economic activity are still powerful. In the real estate sector, even if activity stabilises in the short term thanks to support measures, it is likely to remain hampered by the financial fragility of developers and weak buyer sentiment.
The rebound in economic activity seen at the start of the year after the zero COVID policy was abandoned quickly fizzled out, from as early as spring 2023. Our Pulse below reflects this weak economic performance. Exports have stalled due to weak global demand and tensions with the United States. The crisis in the real estate sector has continued and the number of payment defaults by property developers has increased
The economic indicators for June and the second quarter of 2023 illustrate widespread sluggish economic activity. Chinese households are cautious and limit their spending. They are worried because of the lasting crisis in the real estate sector and the uncertainties surrounding employment opportunities.
The economic rebound that has followed the abandonment of the zero-Covid policy is quickly losing momentum. Domestic demand is held back by a significant fall in consumer and investor confidence, and export momentum is stalling. The authorities are cautiously easing monetary policy, but this may end up having limited effects on credit activity. Further stimulus measures are expected in the short term. They should, among other things, aim to encourage youth employment.
China’s economic growth recovered rapidly following the abandonment of the zero-Covid policy, but it is also running out of steam faster than expected. Domestic demand is held back by a significant loss of consumer and investor confidence, and export momentum is stalling. The authorities are cautiously easing monetary policy, and additional stimulus measures are expected in the short term. They should, among other things, aim to encourage youth employment.
China’s post-Covid economic rebound is running out of steam with surprising speed. Indicators for May 2023 show a slowdown in all demand components.
There were slight signs of recovery in real estate and construction activity following the lifting of health restrictions in December 2022 and thanks to support measures taken by the authorities. However, hopes for sustainable improvement in the property sector soon fell.
Economic indicators for the month of April 2023 suggest that China’s economic recovery is rapidly running out of steam. Granted, health restrictions were lifted recently (December 2022) and there are still some major post-Covid catching-up effects that are bolstering household demand. However, growth in other demand components has weakened.
In Q1 2023, Chinese economic growth stood at +2.2% quarter-on-quarter (compared to +0.6% in Q4 2022) and +4.5% year-on-year (compared to +2.9% in Q4 2022). Activity has indeed recovered rapidly since the abandonment of all the health restrictions last December. The real GDP growth rate in year-on-year terms is expected to accelerate further in Q2 2023.
Chinese economic growth has re-accelerated since the end of January, mainly driven by services and household consumption. The recovery in manufacturing activity is more moderate. In the real estate sector, the crisis is lessening. These improvements will continue in the short term. However, constraints on economic growth remain significant; they principally stem from the weakening global demand and geopolitical tensions as well as from financial difficulties for property developers, local governments and their financing vehicles. Beyond this, the question arises of a lasting loss of confidence in the Chinese private sector.
China’s economic activity started to rebound in late January, driven primarily by services and household consumption. Meanwhile, the crisis in the property and construction sectors has subsided. In the manufacturing sector, the growth recovery has remained moderate, hindered by the fall in automobile production and weakening exports. Economic momentum will remain strong in the short term. However, a number of significant downside risks to growth persist.
Economic indicators for the first two months of 2023 show a rebound in activity following the abandon of China’s zero Covid policy in early December and the end of disruptions caused by a spike in contaminations in December-January.
In Q4 2022, China’s economic growth slowed to 2.9% year-on-year (y/y) from 3.9% in Q3. In quarter-on-quarter terms, activity stagnated. Our Pulse below highlights a broad-based weakening in economic activity during the last quarter of 2022.
The sudden and ill-prepared abandonment of the zero-Covid policy at the start of December 2022 has plunged China into further turbulence. The large epidemic wave has hindered production in the manufacturing sector and again delayed the recovery in private consumption and activity in the services sector. However, assuming that the pandemic starts to ease off in February 2023, domestic demand should finally rebound, helped by additional monetary and fiscal support measures. On the other hand, exports are likely to remain affected by the weakness in global demand. While the current account surplus should narrow in 2023, how capital flows will develop is more uncertain.
The depreciation of the yuan since the beginning of the year and portfolio investment outflows have been largely due to diverging trends in Chinese and US interest rates. They also reflect a loss of investor confidence and the deterioration in China’s economic growth outlook. Meanwhile, China’s external financial position is still very strong.
The latest activity data point to a widespread slowdown in the Chinese economy in October 2022. Industrial growth slowed to 5% year-on-year (y/y) from 6.3% in September, bringing an end to the acceleration seen during Q3 2022. The effects of tax incentives for purchasing cars have worn off, leading to a slowdown in car production. Most notably, the manufacturing sector adjusted its production (the electronics sector, in particular) in response to the rapid slowdown in exports.
In the third quarter of 2022, Chinese economic activity apparently regained ground that was lost during the very strict lockdowns that were imposed in the spring (in Shanghai in particular), and which were gradually lifted from the end of May. Real GDP grew by 3.9% quarter-on-quarter (q/q) in Q3 after a contraction of -2.7% q/q in Q2. Over the first nine months of the year, economic growth stood at 3% year-on-year (y/y).
Chinese economic activity recovered in Q3 2022 (+3.9% quarter-on-quarter and +3.9% year-on-year) following the contraction seen during the lockdown period in Q2 (-2.7% q/q and +0.4% y/y.). The recovery was mainly driven by the industrial sector and helped by the support measures taken by the authorities. In particular, higher public investment stimulated construction activity in infrastructure and tax incentives encouraged car sales. On the other hand, the easing of domestic credit conditions and the support measures for property developers had a very limited impact, and the contraction in the property sector continued. The weakness in private consumption and in activity in the services sector is a cause for concern
The recovery in activity since the end of the lockdowns imposed in Shanghai in the spring has been very gradual. It picked up in August, notably supported by public investment and tax measures, but it is likely to lose steam again in September. As exports begin to suffer from weaker global demand, the continuation of the zero-Covid strategy and the serious crisis in the property sector continue to weigh heavily on confidence, private consumption and investment. An easing of the health policy and more wide-ranging actions to support the property market seem to be the only measures capable of lifting the Chinese economy out of its current gloom. The 20th Congress of the Communist Party, which will open in Beijing on October 16th, will thus take place in a fragile economic environment.
The recovery in activity since the end of the lockdowns imposed in Shanghai in the spring has been very gradual. It picked up in August, notably supported by public investment and tax measures, but it is likely to lose steam again in September. As exports begin to suffer from weaker global demand, the continuation of the zero-Covid strategy and the serious crisis in the property sector continue to weigh heavily on confidence, private consumption and investment. An easing of the health policy and more wide-ranging actions to support the property market seem to be the only measures capable of lifting the Chinese economy out of its current gloom.
Our Pulse shows an improvement in Chinese economic conditions over the period June–August 2022 compared to the previous three months (widening of the blue zone compared to the dotted zone). In fact, the very strict lockdown measures imposed in the spring (in Shanghai in particular) started to be lifted at the end of May, allowing activity to resume. The acceleration in economic growth has remained very gradual. However, it surprised positively in August, both in industry (+4.2% y/y after +3.8% in July and +0.6% in Q2 2022) and in services (+1.8% y/y after +0.6% in July and -3.3% in Q2).
Chinese economic activity contracted by 2.6% quarter-on-quarter in Q2 2022, with almost zero growth (0.4%) year-on-year. This poor performance was primarily the result of mobility restrictions introduced in several of the country’s provinces in response to the latest wave of the Covid19 pandemic, with the strictest restrictions in force from March to May in major economic centres such as Shanghai. The economic shock in Q2 2022 was severe and unexpected, but was nevertheless less violent than that in Q1 2020, when the lockdown measures introduced at the beginning of the crisis resulted in a collapse in activity of 10.3% q/q and 6.9% y/y.
Economic activity contracted in April and May 2022 as a result of severe mobility restrictions imposed in industrial regions such as Shanghai. Since late May, these restrictions have been gradually lifted, and activity has begun to bounce back. However, downside risks to economic growth remain high. The authorities therefore continue to ease their policy mix cautiously. On the fiscal front, support measures remain focused on infrastructure projects and aid to enterprises. On the monetary front, interest rates have been cut since the beginning of the year, and targeted lending programmes have been extended. However, the effectiveness of the central bank’s action is reduced by the weak demand for credit
China’s economic activity contracted in April and May 2022 because of stringent mobility restrictions introduced in major industrial regions such as Shanghai. Since late May, restrictions have eased gradually and activity has started to rebound. As downside risks remain high, the authorities continue to ease their fiscal and monetary policies. While credit demand stays weak in spite of the decline in interest rates, the current global environment and the risk of capital outflows may constrain the central bank’s room for maneuver.
The significant contraction of the blue area relative to the dotted area illustrates the magnitude of the shock faced by the Chinese economy since March 2022. The resurgence of the Covid epidemic has led to the introduction of mobility restrictions in many provinces, with the most stringent lockdowns affecting major industrial and port regions, notably Shanghai. Restrictions have depressed household demand and dampened activity in factories, disturbed the transportation and export of goods, and led to supply-chain disruptions in China and abroad.
China is the world’s second economy. It is also the world’s largest exporter of goods, a global industrial leader and a global financial player. The process of capital account liberalisation and renmimbi (RMB) internationalisation continues gradually and the opening of local asset markets to non-resident investors made rapid progress in the recent past. Meanwhile, controls over resident capital outflows remain significant.
China’s exchange rate regime is a managed float. The Chinese currency has gradually become more flexible and market-determined in recent years, but government discretion keeps significant influence on the direction of the fx rate. The RMB was included as the fifth currency in the IMF Special Drawing Rights (SDR) basket in October 2016.
Economic growth fell to 7.1% per year in 2012-2019 from 10.7% in 2002-2011. In 2020, the COVID-19 crisis demonstrated the Chinese economy’s strong capacity to absorb a major shock and rebound; real GDP returned to its pre-crisis level at the end of Q2 2020 and economic growth reached 2.3% in 2020 as a whole.
In the medium term, China’s structural slowdown is projected to continue. China continues a difficult economic transition: its investment/export-led growth model has reached its limits and far-reaching reforms are still needed to build a more balanced growth model that is more reliant on consumption and services, and less dependent on debt.
