China GDP Update: Details Matter

China exceeded its GDP growth target of "around 5.0%" in 2023, but key data points highlighted the need for sustained policy support in 2024.

Date: January 17, 2023

The Chinese economy expanded 5.2% in 2023, according to preliminary figures released by the National Bureau of Statistics (NBS). This outcome was in line with UBP’s 5.2% forecast. However, excluding positive base effects, 2023 GDP growth came in lower at 4.1%. Moreover, nominal GDP came in around 4.0%, below the 7-10% levels recorded pre-Covid.

We have kept our growth forecast for 2024 unchanged at 4.5%.?However, that entails an acceleration in economic activity going forward. This should be facilitated by a stabilisation in real estate sector investment and a broadening of consumption away from services, towards goods. Policy support will still be needed to address imbalances.

High frequency data suggests that some imbalances persist

Q4-23 growth came in slightly lower than expected at 5.2% y/y (1.0% q/q), up from 4.9% y/y (1.5% q/q) in Q3-23. The tertiary sector expanded 5.8% y/y, significantly outpacing the primary (4.1% y/y) and secondary (4.7% y/y) sectors. Although we will not know the composition of Q4-23 by expenditure until NBS releases final figures, consumption’s contribution share to the growth of GDP soared to a whopping 94.84% in Q3-23. That will likely be sustained in Q4-23.

In terms of activity indicators, December was a mixed bag. Manufacturing and investment stabilised, favoured by recent support measures, while retail sales growth may have started to sputter. Housing continues to be the main drag…

Retail sales declined to 7.4% y/y, missing expectations of an 8.0% y/y expansion (prior: 10.1% y/y). A lot of this decline was led by slower automobile (4.0% y/y) and Chinese medicine (-18.0% y/y) sales. Catering services (30.0% y/y) and cosmetics (9.7%) sales were up. In sequential terms, retail sales actually improved to 0.4% m/m, up from 0.1% m/m in November.

Industrial production ticked up to 6.8% y/y, exceeding expectations of 6.6% y/y (prior: 6.6% y/y). This was partly driven by stronger growth in automobile (20.0% y/y) and electric machinery & equipment manufacturing (10.1% y/y), amid solid exports and a base effects. State Owned Enterprises (SOEs) (7.3% y/y) continue to outperform private enterprises (5.4% y/y). In sequential terms, industrial production actually slowed to 0.5% m/m, down from 0.9% m/m in November.

Fixed Asset Investments (FAI) recovered to 3.0% YTD y/y, exceeding expectations of 2.9% YTD y/y (prior: 2.9% YTD y/y). ?Much of this can be traced back to fiscal support, emphasizing new infrastructure and advanced manufacturing capacity. SOEs (6.4% YTD y/y) continued to outstrip private enterprises (-0.40% YTD y/y) and this gap has widened in the past couple of months.

Housing continues to be the main drag. Property investment declined more than expected to -9.6% YTD y/y, exceeding expectations of -9.5% YTD y/y (prior: -9.4% YTD y/y). Residential property sales declined -6.0% YTD y/y, down from -4.3% YTD y/y in November. The price of homes in China’s 70 largest cities declined further to -0.9% y/y, down from -0.7% y/y in November. Tier 1 prices dipped into negative territory (-0.1% y/y) for the first time since 2018.

Spotlight on structural factors

Another highlight came from the labour front. The surveyed jobless rate deteriorated to 5.1%, up from 5.0% in November. More critically, the NBS resumed the release of youth unemployment (ages 16-24), which stood at 14.9% in December. ?The series has been discontinued, as NBS was working on some inaccuracies. The new definition has been narrowed down to exclude students that are still in school.

Although not strictly related to the GDP and December activity indictors, China also announced data that points to a net population decline. China’s overall population fell by 2.08 million in 2023 to 1.4097 billion, down from 1.4118 billion in 2022, while births declined by 5.6% to 9.02 million in 2023. That does not bode well for structural factors going forward.

Against this backdrop, it is safe to assume that policy easing will continue to be desperately needed to ensure the economic recovery is secured in 2024. The onus will be on fiscal policy. In addition to the 2 trillion yuan (circa 1.6% of GDP) in pledged supplementary lending announced towards the end of 2023, the government is also reportedly considering another trillion yuan (USD 139 billion) in special bond issuance to shore up growth in key sectors.

Due to pressures on the foreign exchange front and concerns around the sustainability of Local Government Financing Vehicle (LGFV) debt, we think that monetary policy support will likely take a background role in 2024. An additional universal interest rate cut is less likely at this juncture. However, there is ample room for Reserve Requirement Ratio (RRR) cuts, as it is no longer necessary for China to sustain such high rates, seeing as they won’t be doing sterilisation to prevent the yuan from appreciating in excess in the years to come.

In sum, although China exceeded its growth target in 2023, a potential growth target of "around 5.0%" for 2024 seems overly ambitious. We maintain our lower forecast of 4.5%, pending the arrival of more resolute policy support.

This article is based on an earlier report by UBP.