China’s 2023 GDP data suggests more stimulus needed to prop up economy

CHINA’S 2023 gross domestic product (GDP) growth of 5.2 per cent exceeded the government’s official target of 5 per cent, but economists said that the data also indicates a need for more fiscal and monetary support.

The latest figure is an improvement from the 3 per cent recorded for 2022, when China was still dealing with the spread of Covid-19.

The better showing has to be seen against the backdrop of a low base, however, as well as various policy interventions.

Also worrying – growth in the fourth quarter eased to 1 per cent quarter on quarter, from 1.3 per cent in the third quarter.

“We expected 2023 to have been marked by a flurry of activities from households and businesses making up for lost time. But it did not pan out, with shaky household confidence and wary businesses scarred by the pandemic,” said Heron Lim, economist at Moody’s Analytics.

Consumption and investment disappoint

UOB economist Ho Woei Chen noted that the recovery was weak, especially on the private consumption and investment fronts.

Retail sales increased by 7.4 per cent year on year (yoy) in December, missing expectations of 8 per cent.

The weakness is confirmation that a housing market downturn is dampening consumer spending through negative wealth effects, said Darren Tay, head of Asia country risk at BMI, the research arm of Fitch Solutions.

More than two-thirds of China’s household wealth is held in real estate.

SEE ALSO

China’s 2023 GDP shows patchy economic recovery, raises case for stimulus

Moody’s Lim is less concerned about the missed target as he believes some spending could have been postponed in view of the impending Chinese New Year (CNY) holiday in February.

In 2022, preparations for the CNY celebration began in December because the holiday took place the following month.

What worries him is deflation, which he said is “almost a sure sign that the economy lacks demand”.

“What concerns us is the worst-case scenario of a self-perpetuating spiral, where falling prices lead households to postpone purchases, further driving down prices,” Lim noted.

On the investment front, December’s fixed asset investment (FAI) expanded a mild 3 per cent yoy as property investment contracted by 9.6 per cent.

These numbers represent a significant decline from the 5.4 per cent and 9.9 per cent increases, respectively, in December 2019, just before the pandemic struck.

“Against this backdrop, state-led investment is crucial,” said DBS economists in a report on Wednesday (Jan 17).

State-owned enterprises’ FAI rose 6.4 per cent in 2023. Investments in strategic sectors such as automobiles, information technology and advanced manufacturing helped counterbalance the decline in property investment.

Manufacturing to fuel growth

State-led investment appears to be yielding results. December’s data showed manufacturing activities picking up. Auto production led the way, rising 20 per cent yoy.

Other high-end technology activities also maintained momentum – electrical machinery rose 10.1 per cent yoy while computer and communications rose 9.6 per cent.

Frederic Neumann, chief Asia economist at HSBC, was cautious about the deflation risks that could come with the government’s boosting of manufacturing capacity, though.

China could have trouble absorbing this excess capacity with its weak consumption sentiment, Neumann said.

Property woes continue

Meanwhile, property worries continue to weigh on the economy. Besides the 9.6 per cent decline in property investment, sales by floor area fell 8.5 per cent in 2023.

December’s new-home prices extended a losing streak into the seventh month, worsening by 0.5 per cent over the previous month, and marking the largest monthly drop since 2015.

“The continued decline in sales volumes and prices shows that easing borrowing conditions alone will not meaningfully boost demand for homes while buyer confidence is still bruised,” said BMI’s Tay.

Without the debt-fuelled spending splurge of prior years, economists expect property investment, prices and new sales to continue to decline through 2024.

A falling population and an ageing profile are also driving this trend, said UOB’s Ho. Last year marked the second straight year of decline for China’s population, which fell by over two million people.

HSBC has as its base case a soft landing in the property sector, contingent on the expectation of more policy support from the government.

In a Dec 27 announcement, the People’s Bank of China committed to increasing targeted credit support for the housing sector, specifically focusing on “three major projects” – constructing affordable housing, renovating urban villages, and building emergency public facilities.

“The new dual-track model with commercial housing and social housing should allow social housing to absorb oversupply and help the broader property sector rebalance,” said the HSBC economists.

With sentiment in the housing market not improving, economists anticipate additional stimulus to be directed towards the government’s other strategic sectors.

“Direct support for households could be the crowbar needed to pry open wallets, but the prospect of such support has been a non-starter for officials in recent years,” noted Moody’s. “Instead, monetary easing and new debt issuance for infrastructure, energy and manufacturing projects look more likely.”

UOB’s Ho, meanwhile, thinks stimulus measures will “remain modest to ensure a reasonable pace of growth unless risks increase sharply”.