China: Consumption recovery kicks in

China’s growth outlook is on track to exceed the government’s 5 per cent target in 2023. After GDP comfortably beat expectations in the first quarter, we are raising our 2023 growth forecast to 5.9 per cent. The recovery will likely pick up speed in the months ahead with consumption doing the heavy lifting. However, lingering weakness in the property sector is weighing on investment.

GDP growth is on track to exceed the modest 5 per cent target in 2023 without requiring fresh major stimulus. Recent economic data has overall exceeded expectations ever since China loosened its strict COVID policies late last year. With seasonally adjusted quarter-on-quarter growth of 2.2 per cent in Q1, we are raising our growth forecast to 5.9 per cent in 2023 and 4.9 per cent in 2024.

Key data

Year-on-year percentage change

*% of GDP **At year-end. Source: IMF, SEB

Household consumption does the heavy lifting. Retail sales has consistently exceeded expectations so far. In particular, the largest improvement can be seen for in-person services, outstripping total household consumption growth. For now, the fastest recovery is occurring in hospitality and catering services.

Larger credit impulse will provide support to capital spending beyond the second quarter. Historically, credit growth leads real activity by 1-2 quarters. Accelerating long-term credit growth bodes well for corporate loans but for now, investment has yet to gather steam. Infrastructure investment slowed in March, reflecting Beijing’s caution on pursuing more aggressive stimulus.

Besieged property sector dampens recovery. Property prices continue to post monthly improvements. Still, confidence in the sector remains weak. Moreover, the recovery in construction is led by state-owned property developers. While some of the distress among private developers has eased, it will take time before these can initiate new projects as the focus has remained on completing stalled existing projects. 

Despite domestic demand recovering, a balanced policy response is required. In late March, the People’s Bank of China (PBoC) reduced its reserve requirement ratio by 25 bps to 10.75 per cent. As long as inflationary pressures remain at bay, we believe the central bank has room to maintain a supportive stance. However, the 3 per cent inflation target set by Beijing dampens expectations of larger stimulus. If the recovery in domestic demand broadens faster than expected, upward pressure on core inflation may emerge. This may prompt the PBoC to tighten financial conditions before end-2023, especially if the growth target is expected to be met. Tighter financial conditions do not require key rate hikes and, in the past, the PBoC has guided interest rates higher by withholding liquidity provisions.

Yuan to appreciate. China’s growth outperformance should allow the yuan to appreciate against the dollar towards 6.60 by the end of 2023. Improving earnings expectations should usher in more foreign inflows to Chinese A-shares. The Shanghai Composite index has risen almost 9.6 per cent year to date. We estimate net inflows have reached USD 27.9 billion so far this year, as of mid-April. As long as regulatory surprises are kept to a minimum, foreign inflows should remain robust.