EIU's revision reflects the lingering effects of the pandemic and lockdowns on China's economy; a return to the pre‑covid growth trend will therefore take longer than expected.
We expect targeted policies to be included in the upcoming politburo standing committee meeting. However, a large-scale fiscal package is unlikely to be introduced, especially as the government's growth targets (5%) remain easily achievable.
We have revised up modestly the trade balance, which highlights positive risk to China's trade tied to the early arrival of EI Niño, the demand resilience in developed markets and the anticipated bottoming out of the electronic cycle in the third quarter.
EIU has revised down China's real GDP growth forecast for 2023 from 6.1% to 5.5%, reflecting quickly dissipating momentum after the country's reopening and the knock‑on impact on the second half of the year. This adjustment reflects our recognition that the recovery is slower than initially anticipated owing to the lingering effects of the pandemic; a return to the pre‑covid growth trend will therefore take longer than expected. We have revised up our growth forecast for 2024 to 5%, primarily as a result of lower base effects related to the aforementioned downgrade, rather than an uptick in the economic prospect. The downgrade primarily incorporates a revision to the second quarter, reflecting the fading momentum after a sharp rebound in the first quarter. We have also revised down third- and fourth-quarter growth, although to lesser degrees, to reflect that policy support will not be enough to take immediate effect. We now expect sequential GDP growth to increase from 0.1% to 1.6% in the third quarter, tied to the resumption of production activities after destocking in that quarter, the gains in the growing sector trickling down to the rest of the economy and the mild boost to confidence following policy easing. Despite this, we caution a slower than expected second-half recovery tied to the knock‑on effects of a weak second quarter. The lack of a meaningful recovery reflects China's struggle and prolonged process to return to a pre‑pandemic GDP growth trend, even with the lifting of covid restrictions.
Private-sector weaknesses are the main drag on growth
Our downgrade primarily stems from the fact that activity in the private sector has quickly lost steam, while official responses have fallen short of our already conservative expectations. As part of the adjustment, we have revised down the growth forecast in real private consumption from 8.9% to 8.1%. Despite a notable resurgence in consumer spending during the first quarter, this has proven to be short-lived owing to sluggish growth in disposable income and subdued employment prospects. Instead, precautionary savings continue to prevail among households. Consequently, China did not experience the same robust consumption recovery observed in countries like the US and Singapore, which benefited from household-focused fiscal stimulus measures. Against the backdrop of high global inflation and escalating geopolitical conflicts, the inclination towards precautionary saving is likely to continue. This, coupled with disruption regulation measures, has given rise to uncertainties in the business environment that dampen both domestic private investment and foreign investment. The stronger than expected exports has not yet translated into investment, reflecting the trade boom mainly benefiting exporters (rather than the producers) as they clean up inventories. Our assessment also incorporates the fact that the property market has remained tepid, in contrast to our previous view of a modest comeback in home sales and a shallow decline in investment activity. The property sector has been a crucial source of investment, construction and consumption; however, the volume of property sales fell by 0.4% year on year in January-May, posing a drag on demand for house appliances and decoration materials.
What to expect next?
We expect more pro‑growth language to be included in the coming politburo standing committee meeting in end‑July, in which the government will review the economic performance in the first half and set policy tones for the rest of the year. However, we remain sceptical that there will be an announcement of any aggressive fiscal stimulus packages. This means that the government will still implement supportive fiscal policy, albeit in a cautious manner. Instead, after experiencing a challenging process of deleveraging, the government is more keen to ensure that public spending will have positive spillovers to productivity and private demand, rather than inflating growth figures. We therefore expect the administration to have a cautious fiscal approach, especially as its growth targets (5%) remain easily achievable despite the emerging pressures. In response to the worsening sentiment and difficulties among the private sector and local governments, we expect the government to target a number of priorities, including local public finance and debt resolution, the financial stress among a broader group of house property developers in need of funding for completion of unfinished buildings, an increase in subsidies for industrial upgrading and tech self‑sufficiency, as well as households consumption on durable consumer goods and services. Overall, this will bring up government consumption from 5% growth to 5.4% in real terms. The concept that a "house (is) for living, not for speculation" will not be abandoned as a core policy agenda, reaffirming our call of the end to China's property market boom. The government will instead target asset price stability, in an effort to avoid panic sell‑off and the outbreak of systematic risk. We therefore expect softened language on property tax and inheritance tax introduction in the third plenum session in November, when the top leadership will outline major economic and social reforms for the next five years. The plenum session could herald more fiscal measures if economic growth remains far below the pre‑pandemic trend, but the size will be incomparable to the size of the package in response to the global financial crisis of 2007‑08 (nearly 10% of GDP), and is unlikely to catalyse much follow‑up investment. Moderate positives unlikely to bring back strong momentum Despite the downgrade of headline GDP growth, we have revised up our forecasts of real growth of exports and imports of 2023 to 1.9% and 2.9%, from 1.4% and 1.9% respectively. Latest data releases show the resilience of China's trade volume, stronger than expected growth in the developed market and the bottoming out of the electronics downturn in the third quarter in 2023. We nonetheless caution against an unbalanced growth of trade. Automotive exports buck the trend of slowing global demand for other goods. Meanwhile weak import amounts mask higher growth in import volumes, which may reflect a pick‑up in demand after China's reopening, but also distortion related to geopolitical relations, in which China may have imported in excess of its genuine demand. For example, Chinese imports from Australia increase as bilateral relations warm, while imports of corn from South Africa surged because of attempts to reduce over‑reliance on the US. The potential excessive trade and the security-driven diversification drive could leave certain countries such as the US in a greater trade deficit with China, fuelling future conflicts and adding uncertainties to trade in the medium term by economic coercion measures. The revised trade forecast further highlighted positives to China's trade tied to the early arrival of El Niño. The heat waves across the world could boost exports of cooling appliances. Power shortages in member countries of the Association of South‑East Asian Nations, such as Vietnam, might present opportunities to China, where supply chains are more resilient. We expect coal imports to increase for electricity generation demand, as well as the tightening regulation of domestic mining activities, especially after recent fatal accidents happening in northern China caused by illegal coal-mining activities. The revision of both exports and imports have resulted in our downward adjustment to the current-account surplus forecast for 2023, from 2.5% of GDP to 2.4%.
Source: Economist Intelligence
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