The takes on China’s economy from media and analysts in 2023 comes across like a Dickens reading list: there have been Great Expectations, ample descriptions of Hard Times, and now – to stretch the wordplay a little – many pessimists are calling it a Bleak House.
But is everything really doom and gloom? This article will take a closer look at the course China’s economy has taken so far in 2023 through a selection of eight charts.
China’s disappointing GDP growth so far has been blamed on many factors: poor domestic and international demand, a property market slump, low consumer confidence and geopolitical tensions. Nevertheless, National Bureau of Statistics spokespeople have rightly pointed out that China’s GDP grew an aggregate 5.5% year-on-year in the first half of 2023 – making it the fastest-growing among major economies. But despite the NBS’s bullishness, many financial institutions have lowered their GDP growth predictions for the remainder of 2023. Economists polled by Bloomberg have cut their estimates from 5.2% to 5.1%.
China’s falling CPI is mostly due to low consumer demand and confidence – which stems from the poorly performing property sector, general economic malaise, and the damage caused by years of severe pandemic controls. Instead of the “revenge spending” that had been predicted, Chinese consumers have been locking up their savings while waiting for the economy to improve. The country’s low PPI, on the other hand, is due to weak domestic and global demand for Chinese goods and materials. It’s also due to a higher base for comparison because global commodity prices soared after Russia’s invasion of Ukraine in 2022.
The resulting deflation has the effect of delaying many consumers’ purchases and investments – especially in houses, cars, and travel – as they wait for prices to stop falling. Deflation also increases the real value of debts. However, there are reasons to believe China’s deflation may be temporary. July’s fall involved one-off factors such as the price of food, particularly pork prices. The same month, China’s “core inflation” – or inflation without volatile items such as energy and food – actually rose from 0.4% to 0.8%. Analysis by BNP Paribas also suggests that China’s economic fundamentals do not meet the typical conditions for lasting deflation, including a contracting money supply, significantly flagging demand, and a consistent loss in confidence.
Manufacturing PMI is an economic indicator representing the rate of expansion or contraction in the manufacturing sector. A result of above 50 implies expansion, while a result below 50 implies a contraction. It is calculated through surveys completed by managers, and focuses on variables like output, new orders, employment, supplier delivery times, and inventory levels. It is an important metric for China because manufacturing accounts for a third of its economy by value.
The spike in manufacturing PMI earlier in the year was probably due to the initial momentum caused by the lifting of Covid-19 controls in December 2022, as well as factories fulfilling a backlog of late orders that had not been completed due to 2022 disruptions, while the subsequent depression in manufacturing orders has been mostly due to low global and domestic demand.
Non-manufacturing PMI is an official index that covers services and construction. Its readings and data are similar to manufacturing PMI, with a reading of 50 implying neither growth nor contraction. Caixin’s equivalent is the Service PMI, which does not include construction.
Both indices rocketed in January, reaching a peak in March. The growth of both indices has been helped by a boom in catering, entertainment and hospitality since the relaxation of Covid-19 controls. However, the growth of both indices has slowed since March, and services PMI softened even further in August, despite it being the first post-pandemic summer season, and in spite of record railway sales and a strong box office performance at cinemas. This indicated a weak performance in the travel industry and a possible consumer shift towards lower-priced services.
Weak foreign demand – due to inflation – and falling purchases of electronic products are the main reason for the declining exports, which has hampered China’s recovery. This overall decline in exports is not unique to China and has been plaguing other economies as well. Weak external demand has also put downward pressure on China’s imports, since many are materials used to manufacture goods for export. Weak consumer demand and China’s struggling property sector have also played a role. However, both imports and exports showed some signs of stabilisation in August, beating analyst’s expectations.
China’s youth unemployment rate rose to a record high of 21.3% in June 2023, breaking the previous record high of 20.8% recorded in May, after which point the government announced it was temporarily suspending the publication of figures.
China’s general economic challenges mean that many companies are retaining older, more experienced staff and not hiring. Young people are generally vulnerable during economic downturns because they have less work experience. Moreover, many among China’s record numbers of university graduates have degrees such as sports and education that don’t match the needs of China’s current employment market – and they don’t necessarily want to engage in certain types of work they consider physically challenging or demeaning.
Young people are big spenders, so unemployment is likely to be sapping domestic consumption growth, and some analysts argue that high youth unemployment risks destabilising society by causing anger and resentment.
The year-on-year change in the price of new houses plummeted in 2022 due to China’s real estate crisis, bearing in mind that many new houses are pre-sold prior to completion. The decline in new house prices narrowed in the first couple of months of 2023. The rate of increase then slowed sharply in May – leading to fears that pent-up demand was already fading – and prices then fell again in June and July.
China’s gargantuan real estate sector is of immense importance to its economy – and even has an impact on the world economy. It is estimated to contribute up to a third of national GDP. It could also have a major impact on the solvency of financial institutions, besides the parlous state of real estate companies themselves. Unfortunately, many reports and analyses suggest that China’s property downturn is far worse than the numbers suggest, with house prices falling by double digits in some areas this summer. The comparatively rosy government figures are likely to be a misleading owing to their survey-based data collection method.
China’s retail sales statistics measure the total value of goods sold to consumers within a month, providing useful insights into consumer confidence and consumption trends ahead of GDP data releases.
China’s retail sales appear to have been boosted by post-Covid ‘revenge spending’ to some degree – as predicted – but a reduction in retail spending since April points to falling demand as a result of depressed consumer confidence. That being said, a sector-by-sector breakdown shows that sales in many areas were robust in July:
In 2023, the Chinese economy has presented a complex tableau, influenced by myriad domestic and international factors. As the eight charts underline, there have been moments of resilience, particularly in certain sectors of retail, juxtaposed against challenging trends like youth unemployment and a wobbly property market. The growth in GDP, despite being adjusted downward by analysts, still makes China the fastest-growing of the major economies. However, concerns around deflation, faltering consumer confidence, and an unsettled real estate sector indicate underlying vulnerabilities.
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