China’s economic recovery: an analysis on Chinese domestic demand

We take a look at China’s domestic consumption, housing market and exports to evaluate the strength of its economic recovery in 2023

China’s economy has been on a slow path to recovery since the end of its strict Covid-19 restrictions in 2022. Since then, the eyes of many have been focused China’s economic recovery.

In this article, we will analyze the strength of China’s economic recovery so far using domestic demand as our indicator and evaluate what we could expect from one of the biggest driving forces in commodity markets in 2023.

China focuses on domestic consumption for economic growth

There were some expectations of a strong consumer market recovery in post-Covid China after the reopening in December 2022, but that long-expected “revenge consumption” has not yet appeared. Retail sales grew 3.5% year over year in January-February this year and travelling during the Chinese New Year showed only a mild recovery.

One of the reasons the recovery has not been more vigorous is that the growth in household income stagnated in the past year. Consumers have generally reduced their expenditures and increased their precautionary savings for uncertainties. It will take some time to boost consumer confidence and release pent-up demand.

The Central Economic Work Conference at the end of 2022 pointed out that “consumption such as housing improvement, new energy vehicles, and elderly care services should be prioritized”. This suggests that the government wants local consumption to be the main engine driving China’s economic growth in 2023.

Automobiles, home appliances, catering and home furnishings account for about 25% of total consumer retail sales. Within this group, automobiles accounted for 10% of total consumer retail sales, or 15% when including fuel consumption.

The Chinese Ministry of Commerce has published their agenda for this year: Stabilizing new car consumption, supporting electric vehicle (EV) consumption, expanding the circulation of second-hand cars and improving car recycling.

The provincial governments have also proposed various policies to stimulate the consumer market:

  • Shanghai: Continue to subsidize the replacement of vehicles with EVs.
  • Zhejiang: Provide subsidies for license plates and parking fees for EVs.
  • In terms of catering and tourism, all provinces have proposed agendas based on their comparative advantages.
  • Shanghai: Promote red tourism, ancient town tourism, industrial tourism and health tourism.
  • Hainan: Hold brand exhibitions such as the Third Consumer Expo, create a landmark project of an international tourism consumption center and promote duty-free shops.
  • Guangdong: Improve the three-level logistics system in counties and villages; 1,530 provincial key construction projects with annual planned investment of RMB 1 trillion.

Housing market has fewer restrictions, but no stimulus

The real estate sector has significant importance to China’s economy, as the whole industry chain accounts for close to 25% of China’s total GDP.

After three years of controls on the housing market, including limiting the financing channels for developers, setting the price ceiling on new/second-hand house transactions and controlling speculation, there are some signs of easing of the restrictions. However, the government’s intent is to provide some stability to the market while not giving up its efforts to reduce overexuberance in the market.

Policymakers insisted during the Central Economic Work Conference that real estate should not be used as a short-term means to stimulate the economy, but as a way to improve housing demand for new citizens and young people.

For real estate, we believe that the government’s goal in easing its policy is not to provide a strong stimulus on the demand side, but to moderately adjust the previous restrictive policies to release effective demand.

On the supply side, we believe the government wants to promote industry restructuring and mergers and acquisitions, effectively prevent and resolve the risks of high-quality leading property development enterprises and improve their balance sheets.

The real estate sector in Tier 1 and some strong Tier 2 cities could benefit more from this round of policy easing with turnover rates rebounding and mild price increases. Tier 3 and below cities will still suffer from oversupply and population outflow.

Chinese exports still weak in Q1 but may accelerate in the second half of 2023

China benefited from booming exports in late 2020 and 2021 due to the pandemic. But shipments slowed over the course of 2022 as global economies reopened, consumers shifted spending from goods to services and supply chain issues hurt manufacturing.

Early this year, stacks of empty containers at ports triggered concerns of plummeting exports, but these were actually caused by the timing of the Chinese New Year holiday and an abundant supply of new containers – three times more than in average years; for the past two years, China’s Container Throughput Index has still been significantly higher than overseas countries.

We believe that exports will gradually start to turn higher later this year, in conjunctions with improvements in the global economy. The concerns that may affect Chinese exports and hold back growth largely relate to trade tensions with the US and how long inflation lingers.

The trade war with US that began in 2018 caused China’s trade share to the US to drop 6 percentage points from 22% to 16%. Now, ongoing tensions around key technologies and efforts to diversify supply chains could dampen future growth. US sanctions may prevent China from accessing some key materials/parts and affect manufacturing and final goods delivery.

But considering the stickiness of the export orders with potential difficulties in switching suppliers due to quality concerns, finding qualified labor and logistics, we expect this shift to be gradual with China still having many advantages.

China’s economic recovery will gradually build momentum in second half of 2023

Overall, China’s economy has passed the darkest moment and it is on a gradual recovery, although it still faces many headwinds.

The government has issued various policies to boost consumer confidence and improve corporate investment. Exports, which now are no longer the driver of the economy that they were in recent years, should at least become more supportive in the second half of the year, and the property market will serve more as a stabilizer of the economy instead of a booster.

Our forecast assumes that economic improvement will start gradually in the second quarter and build momentum over the second half of the year.

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