China's economy grew 5.2% in 2023, hitting the official target

In 2023, China faced several challenges including a subdued consumer spending, property crisis, and high youth unemployment rates. Despite these obstacles, China managed to achieve a 5.2% year-on-year growth rate. However, this growth rate still falls short of the 6%-plus annual average seen in the decade preceding the Covid-19 pandemic.

China’s economic growth has shown signs of improvement, yet the recovery remains fragile. According to data from the National Bureau of Statistics, China’s GDP in 2023 grew by 5.2% year-on-year, largely attributed to the low base in 2022. The reopening of the economy bolstered economic activities in the first quarter. However, growth decelerated to 0.6% quarter-on-quarter in the second quarter, then rebounded to 1.5% in the third quarter, and stabilized at 1.0% in the fourth quarter. China’s economy faced challenges in its recovery, hindered by short-term constraints such as weak consumer confidence, the ongoing housing market recession, and low demand for exports overseas. Additionally, structural issues such as economic imbalances and industry disparities further challenged the recovery process.

Consumption emerged as a key driver for economic recovery once again. China’s retail sales of consumer goods rose by 7.2% year-on-year in 2023, reaching approximately $6.63 trillion, marking a record high. Some positive indications were also observed in industrial output. In 2023, profits of major industrial enterprises nationwide decreased by 2.3% compared to the previous year, but the rate of decline narrowed by 1.7 percentage points compared to 2022. Since August, profits of major industrial enterprises have consistently grown positively for five consecutive months. Despite experiencing declines in the first and second quarters, profits surged by 7.7% and 16.2% in the third and fourth quarters, respectively, indicating a rebound and relatively rapid growth.

Trade Momentum in China is Stagnating

In the past year, global trade experienced sluggish performance, primarily due to weak external demand directly affecting exports.

Graph showing China's trade in 2023

China saw a decline in overall exports for the first time in seven years. In 2023, exports totaled 3.38 trillion USD, marking a 4.6% decrease compared to the previous year. The last instance of China witnessing a decrease in overseas shipments was in 2016, when exports dropped by 7.7%. Source: National Bureau of Statistics of China.

Following the significant decline, the average share of exports to the United States and Europe in 2023 remained at 15.0%, a decrease of 2.0 and 2.5 percentage points respectively compared to pre-Covid levels. Surpassing both the United States and Europe, the Association of Southeast Asian Nations (ASEAN) emerged as the largest export destination, with its share rising from less than 8% in 2005 to 15.5% in 2023.

According to the General Administration of Customs, the biggest highlight of China’s export performance in 2023 is the so called “new three types” products, including new energy vehicles, lithium batteries and solar cells. The total exports of these three types of products exceeded 1400 billion USD for the first time, increasing by 29.9% YoY.

The Deepened Real Estate Crisis in China

Real estate development in Sanya, China

In 2023, China's real estate market failed to recover as anticipated by officials. Plummeting home sales pushed Country Garden, one of the top real estate developers in China, to the brink of collapse.

China’s real estate sector has faced considerable setbacks since the onset of the Covid-19 pandemic. While there are early signs of recovery, supported by the implementation of favorable policies and the resurgence of consumer confidence, the industry continues to grapple with the complexities of structural adjustment.

The Chinese government has intensified its efforts to promote the structural adjustment of the real estate market. Central policies have shifted from maintaining stability to complete easing, particularly after the Politburo Special Meeting in July marked a turning point. To stimulate demand for home purchases, the Ministry of Housing and Urban-Rural Development announced its support for adjusting mortgage lending policies and measures related to the identification of first-home buyers. Under these adjustments, households without property ownership in a specific locality will be considered first-home buyers and eligible for low-interest loans from banks. Additionally, the government has relaxed financing restrictions to alleviate financial pressures faced by real estate enterprises.

In response to the central government’s directives, by the end of 2023, nearly all restrictive measures on house purchases in third- and fourth-tier cities had been lifted. According to data from the central bank, starting from November, the Industrial and Commercial Bank of China, Agricultural Bank of China, and other major banks have lent more than 4.4 billion USD to non-state-owned real estate developers.

Despite the relaxation of policies in China’s real estate industry, domestic housing demand remained sluggish in 2023. During the twelve months, the total value and floor space of new homes sold decreased by 6.5% and 8.5%, respectively, compared to 2022. A similar situation was observed in the commercial housing market, with the sales volume declining to 16 billion USD, down by 6.5% year-on-year.

Graph showing China house sales 2023

Over 60% of the top 100 real estate companies experienced declines in performance compared to the previous year. Among them, 31 companies saw their performance drop by more than 30% year-on-year. For a considerable period, Chinese real estate enterprises have maintained high levels of leverage, debt, and turnover, necessitating continuous access to smooth financing tools. The pandemic has hindered the sales collection of real estate enterprises, putting significant pressure on their cash flow.

As we enter 2024, the business environment is expected to remain bleak. The compounded pressures from the pandemic and economic downturn, coupled with declining consumer affordability and a more conservative investment mindset, are likely to persist.

Renewable Energy - New Driving Force for Economic Growth

In 2023, China prioritized investments in solar power, solar panels, electric vehicles (EVs), and batteries within its renewable energy sector. Notably, investment in this field surged by 40% year-on-year to reach $890 billion USD. New energy initiatives accounted for 13% of China’s fixed assets investment, marking a significant increase from the previous year’s 9%, despite contractions observed in sectors like real estate.

Engineer at a solar plant in Fujian, China

The notable upsurge in investments, especially in solar and wind sectors, underscores China’s strategic commitment to diversify its energy mix and diminish dependence on conventional sources. In a significant milestone, China’s installed renewable energy capacity, encompassing wind power, solar power, hydropower, and biomass energy, has surpassed thermal power for the first time, comprising over half of the country’s total installed power generation capacity.

Several projects that integrate power production, transmission, load management, and energy storage are currently in development. Additionally, investments in electrochemical energy storage and green-hydrogen production projects are experiencing rapid growth.

In 2023, the energy economy saw a resurgence, reaching its highest level in recent years and indicating a strong market. However, considering the challenges posed by more frequent extreme weather events, China is anticipated to prioritize enhancing the security of its energy system and ensuring the stable operation of the energy economy.

About this report

This report was compiled with contributions from the team of business experts in our China offices.

ARC Consulting, a division of ARC Group, is an advisory firm specialised in supporting western companies operating in Asia. Our mission is to bridge between the business ecosystems of Asia and those in Europe and the US. Our services cover market entry and expansion, production and sourcing, cross-border M&A as well as ESG and operational improvement and compliance.

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