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China reaction: GDP as expected, questions raised on policy direction

  • 18 January 2024 (5 min read)

  • The progress in China's economy in the last year aligned with our expectations, achieving a growth of 5.2% yoy. More importantly to officials, it achieved the government’s growth target too.
  • However, the monthly figures present a mixed picture. Policy impacts were evident in investment, which accelerated to 4.1% yoy in December from 2.9% in November.
  • Yet, the stimulus package failed to revive private consumption, as retail sales decelerated to 7.4% from 10.1% in November.
  • The pessimistic market reaction raised questions about the efficacy of the stimulus package, calling for more attention to the labour market and the restoration of the consumer sector.

Target met for 2023, thanks to 2022

China’s economy expanded by 1.0% qoq (5.2% yoy) in Q4 2023, meeting the year-end growth target of “around 5%”, as we expected and in line with our 5.2% forecast. However, the story beneath the numbers was not so reassuring. This annual growth largely benefitted from 2022 base effects, which grew by a mere 3.0%. Additionally, revisions to the quarterly seasonally adjusted GDP figures for the past seven quarters raise questions about the reliability of the statistics.

The recovery in 2023, post-COVID restrictions, was uneven. Missing was the strong economic rebound and the release of excessive consumer savings, while the ongoing property downturn and subdued prices continued to exert downward pressure on the economy. Beijing's recent policies signal that investment-driven stimulus is the strategy for the year. While increased investment appears to be contributing to GDP figures, the transition to the household sector could be slow, potentially weakening its efficacy amid decreasing capital efficiency and risks of overcapacity in China's economy. What truly needs policy attention is household demand. Reduced income, rising job insecurity, a loose labour market, and devalued properties have collectively eroded consumer confidence. Without restoring faith in consumers, meaningful recovery and sustainable growth in the economy seems unlikely.

December mixed picture raises questions on stimulus package

Fixed asset investment (FAI), a direct beneficiary of recent easing policies, recorded annual growth of 4.1% in December (Nov: 2.9%). This was propelled by investment in infrastructure (including utilities) and the manufacturing sectors, both increasing by 8.2% yoy (8.1% and 7.1% in November, respectively). Private investment, a better reflection of broader market sentiment, reversed the downward trend from November, growing by 0.9% yoy in December (Nov: -0.5%).

Industrial production (IP) also saw an uptick in December, rising by 6.8% yoy (6.6% in November). The manufacturing sector remained resilient, with a 7.1% yoy increase, up from 6.7% in November. Car production rose by 24.5% yoy (Nov: 23.6%), and electric vehicle (EV) and solar cell production continued their strong momentum, growing by 43.7% and 35.7% yoy in December, respectively.

However, retail sales bucked the trend of mild acceleration slowing to 7.4% yoy (10.1% in November), disappointing the market (BBG: 8.0%). While restaurant and catering services improved further to 30.0% yoy in December (up from 25.8% in November) and benefitting from the Covid re-opening of the last year, consumer goods slowed to 4.8% yoy from 8.0% in November.

Thanks to the positive momentum from recent policy initiatives, certain sectors in the economy showed improvement in the last month of 2023. However, retail sales did not, highlighting challenges in reviving consumer confidence and emphasising the importance of addressing the loose labour market and the ongoing property downturn.

Misalignments in the economy risk the outlook

In 2023, FAI saw a growth of 3.0% yoy, driven by investments from state-owned enterprises (SOEs) with a rise of 6.4%. Conversely, private investment declined by 0.4%, raising concerns about China's economic outlook. Infrastructure-related sectors attracted the most investment, with utilities and railway transportation advancing by 23.0% and 25.2%, respectively. The manufacturing sector, less reliant on SOE investment than infrastructure, grew by 6.5%. IP expanded by 4.6% in 2023, led by the manufacturing sector's 5.0% growth.

However, there were two notable misalignments in economic performance for 2023. First, there was a persistent divergence between sales in consumer goods and services. The drag from consumer goods continued to outweigh the resilience in services sales, suggesting consumers' reluctance to make purchases, especially in big-ticket items, indicating deeper concerns over financial security. Second, subdued sales in consumer goods and weaker exports (-4.6% in 2023) contrasted with the relatively better performance in the manufacturing sector. This could increase the risks of overcapacity and oversupply, exacerbating resource misallocation and reducing efficiency in China's economy.

What next?

After the release of Q4 GDP and December figures, China’s equity market saw a wave of selloff, with the CSI 300 dropping by 2.2% on the day. Although Q4 GDP broadly met market expectations, the lack of policy impact on the monthly data raised questions about the 2024 policy blueprint. While the stimulus rollout is currently progressing at a good pace, its efficacy remains under question, even setting aside property stabilisation, which is likely to require more time. Instead of directly supporting the private sector and implementing a broad-based VAT reduction, which could provide an immediate boost to the labour market and private consumption, Beijing insists on taking a detour toward investment, risking the deterioration in resource misallocation in the future.

That said, investment-driven stimulus should eventually contribute to broader activity. Therefore, we maintain our outlook for 2024, expecting the economy to expand by 4.5% for the year as a whole. But downside risks surrounding the efficacy of policy outweigh the upside risks at this stage. Should Beijing shift its policy direction more to the consumer side in the coming months, it would mitigate our concerns and bring a brighter outlook for 2024.


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