Article 6 July 18, 2023

The Chinese economy slowing faster than expected and with less policy room

China’s GDP YoY (6.3%) fell short of expectations in Q2 2023 despite a favorable base effect from the weak Q2 GDP growth last year in the midst of Covid-related restrictions. The (seasonally adjusted) QoQ GDP growth rate was only 0.8%, significantly lower than 2.2% QoQ in Q1 2023, pointing to a rapidly weakening economic recovery. Here are several issues to consider when understanding what is happening with the Chinese economy.

Firstly, Chinese households have become more cautious about spending. In Q2 2023, households’ consumption propensity was only 68.2, which is lower than the pre-pandemic level (70.5 in Q2 2019 and 71.2 in Q2 2018). In fact, the growth of retail sales was only 3.1% YoY for June 2023, as opposed to 12.7% YoY in May.

Secondly, investment is still sluggish. The growth of fixed asset investment decelerated to 3.8% YTD YoY in June from 4% YTD YoY in May. Specially, the real estate sector witnessed the most prominent decline from -7.2% YTD YoY to -7.9% YTD YoY. Due to the concerns about public debt, the government-led infrastructure investment remained prudent, with its YTD growth rate declining to 7.2% in June from 7.5% in May. The growth rate of investment into manufacturing is the only one which has remained stable at around 6%.

Thirdly, export growth declined by -12.4% YoY in June, but at the same time, the weakening consumer spending also led to a decline in imports by -6.8%.  The very weak export growth this June, though, is mainly related to a base effect. In fact, the trade surplus continued to increase in June to USD 71 billion from USD 66 billion in May.

As such, the Chinese economy has exhibited a much slower growth trajectory heading into H2 2023. The QoQ growth rate of 0.8% equals to an annualized growth rate of only 3.3% for Q2 2023, which is much lower than the 6% figure before the pandemic. That being said, the base effect will continue to provide support for the remainder of the year, albeit to a lesser extent than H1 2023. This means that achieving the GDP growth target of 5% set during the Two Sessions back in March will be increasingly challenging without a stimulus.

Despite that the stimulus is needed to reach the 2023 GDP growth target and avoid a further rapid growth deceleration in 2024, we are conservative about the extent of the policy support down the road. Fiscal policies may not be easily implemented in the current situation, given the already high public debt and the reduced efficiency of these policies. There is a possibility of further reduction in interest rates and/or the required reserve ratio (RRR), but the effectiveness of the monetary policy space may be limited due to the lack of investor confidence. Currently, the market is awaiting further regulatory relaxation on key sectors, such as the real estate sector, which could help bolster investors’ confidence.

Given the above, we lower our Chinese GDP forecast to 5% in 2023, in line with the floor of the government’s target.

July 17, 2023

Best regards,


Chief Economist Asia Pacific


Global Markets Research

Corporate & Investment Banking

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