China Economic Update Report
Quarter 2, 2023
In this issue:
China's GDP expanded 6.3% (YoY) in Q2 2023, missing the forecasted 6.9% growth
In the second quarter of 2023, China’s GDP grew 6.3% year-on-year, accelerating from 4.5% in the previous quarter. However, on a quarter basis, GDP grew just 0.8% in Q2, a significant slowdown from the 2.2% quarter growth registered in Q1.
According to data from the Chinese National Bureau of Statistics, China’s economy expanded by 6.3% in Q2 from a low base effect in 2022. The economy experienced remarkable growth in GDP after the lifting of pandemic restrictions in Q1 this year. However, the data in Q2 suggested that China is losing steam in its economic recovery.
In Q2, the investment market in China experienced a weaker recovery. Affected by a slowdown in the issuance of local government special bonds since June, the cumulative infrastructure investment in the first half of the 2023 increased by 7.2%, decreasing 0.3 percentage points compared to the recorded number in the period from January to May. The impact of the declining real estate market on overall investment continued to deepen, with the cumulative real estate development investment decreasing by 7.9% YoY. Although influenced by the decline in exports, the cumulative manufacturing investment maintained a 6% YoY growth, of which investment in the high-tech industry contributed the most.
According to the officials, the recovery and expansion of domestic demand will still be the key to China’s recovery of economic growth in the second half of the year. The government will further initiate a series of stimulus policies, for example, monetary policies may have cuts on interest rates and required reserve ratios.
China’s exports plunged due to the falling global demand
In Q2 2023, the total value of exports declined by 4.6% YoY. Specifically, China’s exports experienced a significant plunge in May and June, recording a 7.1% and 12.4% decline respectively.
The decline is mainly caused by reduced order backlog and weakened overseas demand, and the trend downwards trend has been especially apparent after the strong growth of exports in March and April.
China’s exports to its main trade partners, ASEAN, the EU, and the United States, have shifted from 14.8%, 15.1%, and 17.4% respectively in 2020, to 15.8%, 15.5%, and 14.4% in the first half of 2023. Exports to the United States have fallen the most among the trade partners this period, largely attributed to diplomatic tensions. At the same time, exports to Russia have risen sharply.
Noticeably, demand for raw materials also showed signs of weakness, with copper imports down 16.4% in June compared with last year.
The growth of the product and retail industry missed expectations in Q2. Consumption gets a boost but still room for monetary easing.
Following a fading low base effect and the poor result of the “618 Shopping Festival”, China’s mid-year online sales promotion, the consumption growth slowed down significantly over two consecutive months, missing the market expectations. The total retail sales of consumer goods in June only increased by 3.1% YoY, a sharp decline of 9.6 percentage points compared to the figure in May 2023.
The disappointing growth may be ascribed to three factors. On one hand, Q1 2023 was in the early stage of the post-pandemic phase when the market was experiencing strong revenge consumption, causing a certain consumption overdraft effect in Q2. Secondly, the momentum of economic recovery in the second quarter showed a declining trend. The growth of people’s income has been slow while many residents still suffered from financial loss from the pandemic. People’s spending and consumer confidence have been affected severely. In June, the unemployment rate for young people (16-24 years old) recorded a new high, rising to 21.3% from 20.8% in May. Thirdly, the property market continued a slow growth trend in the second quarter, also damaging consumer confidence.
According to officials, increasing and stimulating aggregated demand is the key to maintaining Chinese economy momentum in the long run, and therefore policies must be optimal to stabilize the property market and further improve consumer confidence.
Officials have stated that supporting policies will be introduced to promote the development of automobiles, smart household appliances, and the catering industry in order to boost consumption and economic recovery. Noticeably, to boost the domestic demand for EVs, the executive meeting of The State Council held on June 2nd pointed out that it is necessary to optimize the purchase tax reduction and exemption of new energy vehicles, build a high-quality charging infrastructure system, further stabilize market expectations, optimize the consumption environment, and greater release the consumption potential of new energy vehicles.
China is now facing obstacles in the economic recovery as suggested by the relatively weak domestic demand growth. More precise and strong measures may be needed to extend.
China is vigorously encouraging the renewable energy industry
The National Development and Reform Commission (NDRC) and the National Energy Administration recently jointly released a new guidelines, stating that China will ensure the full coverage of charging stations at a county level and at township level.
Currently, China’s charging infrastructure network has the largest number of charging facilities with the widest coverage in the world. According to Bloomberg, by September 2022, the number of new energy vehicle charging piles in Guangdong Province alone was about three times the number of public charging piles in the entire United States. By June, the current car-to-pile ratio has reached 2.5:1. The national target set by the NDRC is 1:1 by 2030.
There is no doubt that China leads the world in vehicle electrification and strives to build road network connectivity devices. China’s NEV development has been on a fast track recently. The output and sales of NEVs were 2.29 million and 2.22 million in the first four months of this year, respectively, both surging 42.8 percent YoY.
The surging sales growth can also be seen in the new energy commercial vehicle market. Sales of new energy heavy trucks reached a peak in December 2022. As the purchase of new energy vehicles will no longer be subsidized in 2023, sales returned to normal levels, achieving 14% YoY growth in the first half of 2023.
In response to the national supportive strategy for the new energy industry, many provinces have introduced specific favorable policies. For example, in the Greater Bay Area, the local government vigorously promoted the EV industrial cluster in Zhaoqing City. Large subsidies for eligible R&D institutions in the hydrogen fuel cell vehicle industry are also provided by Guangdong’s government to attract foreign companies.
In conclusion, there is evidence that China will continue to make huge invest in developing and supporting the new energy industry and bet on it to drive the recovery of manufacturing.
About this report
This report was compiled with contributions from the team of business experts in our China offices.
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