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H1 GDP Results in China Called for More Stimulus

GDP growth in China in 2022 was only 3.0%, far below the 5.5% target set at the beginning of the year. During the Covid-19 lockdown, economic activity was disrupted, resulting in poor performance. People were anticipating a drastic recovery in 2023 after all the Covid-19 measures were lifted, and the state policymakers in January set a moderate "overall 5%" annual growth target.

Chinese New Year consumption and infrastructure investment, combined with accumulated demands and back orders, drove Q1 GDP growth to 4.5%, exceeding market expectations.

The GDP growth rate for Q2 was 6.3%, and the Y-o-Y growth rate for H1 2023 was 5.5%. Official media reports indicate a healthy economic recovery, but foreign financial institutions and new media are concerned with the results.

Low Base Effect in Q2 2022

During Q2 of 2022, GDP growth was only 0.4% due to a nationwide lockdown; therefore, the market anticipates 7.3% quarterly growth instead of 6.3%. Based on Q-o-Q comparisons, Q1 grew by 2.2% compared to the previous quarter, but Q2 only grew by 0.8%. According to economists, this implies the rebound is slowing, making achieving the target in the second half of the year difficult.

Troika for GDP growth: in the blink

Chinese economic stakeholders believe that the nation's GDP growth has always been driven by three segments: Fixed Asset Investment, Domestic Consumption, and Exports. These three segments, usually referred to as “Troika for Chinese GDP growth”, seem all to be having issues:

40% of China's GDP is derived from fixed assets investment. Even though cumulated fixed asset investment increased 3.8% in H1, slightly better than expected; the rate was lower than the growth rate of GDP. The government invested 7.2% in infrastructure projects in this period, which is a common strategy for boosting GDP.

In the first six months of the year, Real Estate Developments reported a drop of 7.9%. By June, the monthly drop had reached -20.6%: two consecutive months with a drop exceeding 20%. China's largest developer, Evergrande, that underwent a financial crisis two years ago, recently reported a net loss of US$81 billion in 2021 & 2022, with a debt of US$340 billion at the end of 2022. US$ 340 billion - more or less equals the annual GDP of Finland (Rank 46 in 2022).

The audit firm of Evergrande refused to endorse the going concern of the corporation. It said it lacked enough information to provide an opinion about the company’s ability to resolve its troubles. Unfortunately, Evergrande is not the only developer in China facing financial issues, there are many others with similar problems, maybe on a smaller scale. Due to these circumstances, the general public has very little interest in investing in real estate.

More Savings in The Bank; Less Spending in The Market

The initial expectation was that households would have "Revenge Spending" after the Covid-19 locking down relaxed and everything would return to normal. Even though there were some booming consumer markets during long holidays such as Chinese New Year and Labor Day (May 1), the high spirit of spending was nowhere to be found. It is still emerging that people are avoiding tapping into their "excessive savings" as the number of household savings in Q1 2023 increased by 2.08 trillion RMB (US$300 billion) compared to the same period in 2022.

According to media interviews and research, people lack confidence in their future, such as job security, and want to save for rainy days.  When people lose confidence in the security of their jobs, the effect ripples back to the consumer market and the service and manufacturing sectors. As a matter of fact, some experts have already expressed concern of teetering on the brink of deflation: June's inflation rate was exactly 0%, arriving close to the cliff's edge. 

Mexico is Overtaking China as US’s No.1 Importing Country

According to the US Department of Commerce, US imported US$195 billion worth of goods from Mexico in the first five months of the year, but only US$169 billion worth from China. As a result, China's status as the US's No.1 importing partner country is under threat.  There was also a decline in exports to other important regions like the EU, Japan, Korea, ASEAN, and "Belt and Road" partners. Statistics show that exports plunged 12.4% in June (in dollars). Inflation in developed countries and geopolitics will still exert pressure on China's export performance in H2.

Desperate for A Solid Stimulus Policy on the Table

Markets have been waiting for policymakers to launch stimulus to give the economy a boost for a long time. The officials announced some favorable policies, such as the People's Bank of China (PBOC) reducing key interest rates, extending tax breaks for new energy vehicle purchases until 2027, etc. There is a perception, however, that the depth of these stimuli wasn't enough to boost domestic consumption and that more solid plans are needed to re-establish confidence.

In a recent press conference from PBOC (China's central bank), the PBOC promised countercyclical policies, but few measures have yet been implemented. Policymakers need to develop a solid plan as soon as possible.

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