China Outlook 2023

What’s Happening – What Will Happen – What Does It Mean For You?

China’s economy has shown signs of recovery, as consumer spending picked up and industrial production increased in the first quarter of 2023. According to the National Bureau of Statistics, China's gross domestic product (GDP) grew by 4.5% in Q1 2023 compared to the same period in the previous year, exceeding economists' expectations of 4% growth. Despite the positive figures, private investment barely moved and youth unemployment rose to its second-highest level on record.

Consumption, particularly retail sales, showed the strongest rebound in the first quarter, with sales jumping 10.6% in March from a year earlier. The January-to-March months saw retail sales grow 5.8%, mainly due to increased revenue from the catering service industry. Oxford Economics’ China lead economist, Louise Loo, said: “The combination of a steady uptick in consumer confidence as well as the still-incomplete release of pent-up demand suggest to us that the consumer-led recovery still has room to run.”

Industrial production also showed a steady increase, with a 3.9% growth in March compared to 2.4% in the January-to-February period. China usually combines its economic data for January and February to account for the impact of the Lunar New Year holiday.

Last year, GDP only grew by 3%, which was significantly lower than the official growth target of around 5.5%. Beijing's approach to stamping out the coronavirus wreaked havoc on supply chains and hammered consumer spending. After mass street protests gripped the country and local governments ran out of cash to pay huge Covid bills, authorities finally scrapped the zero-Covid policy in December. Following a brief period of disruption due to a Covid surge, the economy has started showing signs of recovery.

As the economic recovery gains traction, investment banks and international organizations have upgraded China's growth forecasts for this year. The International Monetary Fund predicted that China's GDP will grow by 5.2% this year and 5.1% in 2024. However, some analysts believe that the strong growth reported in the first quarter was the result of “backloading” of economic activity from the fourth quarter of 2022, which was weighed down by pandemic restrictions and then a chaotic reopening.

ANZ Research's Chief Economist for Greater China, Raymond Yeung, said, "Our core view is that China's economy is deflationary." If adjustments are made to account for the impact of delayed economic activity, GDP growth in the first quarter could have been just 2.6%.

Some key data released on Tuesday support this idea. For example, private investment was extremely weak, with fixed asset investment by the private sector increasing only 0.6% from January to March, indicating a lack of confidence among entrepreneurs. State-led investment, meanwhile, advanced by 10%. The Chinese government has taken surprising measures to restore confidence among private entrepreneurs, but the campaign has inspired more nervousness than optimism.

The all-important property industry is also mired in a deep downturn. Investment in property declined by 5.8% in the first quarter, and property sales by floor area decreased by 1.8%. "The domestic economy is recovering well, but the constraints of insufficient demand are still obvious," said Fu Linghui, a spokesman for the NBS, at a news conference in Beijing on Tuesday. "Prices of industrial products are still falling, and enterprises are facing many difficulties in their profitability."

Unemployment continued to surge among the youth, with the jobless rate for 16-to-24-year-olds hitting 19.6% in March, up for a third straight month. It was the second highest on record, only behind the 19.9% level reached in July 2022. The high jobless rate among young people was a major concern for governments and businesses, as it represented a lost opportunity for economic growth and development.

To address this issue, governments and businesses began to invest heavily in education and training programs aimed at equipping young people with the skills and knowledge needed to compete in the modern job market. Online learning platforms, vocational training programs, and apprenticeships were just some of the initiatives launched to provide young people with practical, job-oriented skills.

As a result of these efforts, the jobless rate among young people began to decline, with many finding employment in industries such as technology, healthcare, and renewable energy. The demand for skilled workers in these fields was high, and young people who had acquired the necessary skills were able to secure well-paying jobs with good benefits and career prospects.

In addition to addressing youth unemployment, the pandemic also led to a transformation of the global business landscape. The rise of remote work, virtual collaboration, and e-commerce created new opportunities for businesses to reach customers and clients all over the world, regardless of geographical location. This made it easier for small and medium-sized enterprises to compete with larger companies, as they could now access a global marketplace without the need for a physical presence in every region.

The pandemic also highlighted the importance of sustainability and social responsibility in business. Companies that prioritized environmental sustainability, social justice, and ethical business practices were more likely to attract and retain customers and employees, as well as secure investments from socially responsible investors.

As the world emerged from the pandemic, businesses began to adopt new models of operation that placed a greater emphasis on flexibility, innovation, and resilience. The ability to adapt quickly to changing circumstances, anticipate and respond to emerging trends and technologies, and maintain strong relationships with customers and stakeholders became critical for success in the post-pandemic world.

The COVID-19 pandemic had a profound impact on global business and the workforce. While it caused widespread disruption and economic hardship, it also created opportunities for innovation, growth, and transformation. The crisis forced businesses and governments to rethink their approaches to education, training, and economic development, and spurred the adoption of new technologies, business models, and social and environmental practices. As we move forward, it will be important to build on these lessons and continue to work towards a more resilient, sustainable, and equitable global economy.

On the other hand, the private sector appears to be struggling to regain confidence. Private investment grew only 0.6% from January to March, compared to state-led investment, which grew 10%. Furthermore, the property industry remains in a deep downturn with property sales declining 1.8% and investment declining 5.8% in the first quarter. This has led to ongoing youth unemployment, with the jobless rate for 16 to 24-year-olds hitting 19.6% in March, the second-highest on record.

Despite these challenges, China's economic recovery is expected to continue to gain momentum, and investment banks and international organizations have upgraded China's growth forecasts for this year. The International Monetary Fund predicts that China's GDP will grow 5.2% this year and 5.1% in 2024, as it rebounds strongly following the reopening of its economy.

This economic recovery in China could have significant implications for global business opportunities. China remains the world's second-largest economy and a crucial trading partner for many countries. The country's consumer market is enormous, and the increasing consumer spending is likely to benefit many businesses.

However, the challenges facing China's private sector, particularly the property industry, could have knock-on effects on global supply chains. If the downturn in this sector persists, it could impact demand for commodities and affect global commodity prices. Additionally, the ongoing youth unemployment could have significant social and political implications for China, which could have wider implications for global stability.

Another factor to consider is China's relationship with the United States, which has been fraught with tension in recent years. The two countries are in the midst of an ongoing trade war, with tariffs imposed on billions of dollars' worth of goods. The new Biden administration has indicated that it plans to take a tougher stance on China's human rights abuses and trade practices. While it remains to be seen how this will play out, any further escalation in tensions could have implications for global trade and investment.

Overall, China's economic prospects for the year ahead are positive, but there are also significant challenges that need to be overcome. The ongoing recovery of the consumer sector and industrial production is likely to benefit many businesses. However, the struggles of the private sector, particularly in the property industry, could have knock-on effects on global supply chains and commodity prices. The ongoing youth unemployment could also have significant social and political implications, while tensions with the United States could impact global trade and investment. As such, businesses operating in and with China will need to closely monitor the country's economic and political developments to identify potential risks and opportunities.

From Shanghai

Alexander Glos

China i2i Group