China has officially forecast a growth of “around 5 per cent” for 2023, down from the previous target of “above 6 per cent” set in March. The world’s second-largest economy grew by 5 per cent in the first half of 2023, but faced a slowdown in the third quarter due to weak exports and a crisis in the property sector.
According to the National Bureau of Statistics (NBS), China’s gross domestic product (GDP) expanded by 4.9 per cent year-on-year in the third quarter, missing the market expectations of 5.2 per cent. On a quarterly basis, GDP grew by 0.2 per cent, the lowest since the first quarter of 2020 when the Covid-19 pandemic hit the country hard.
The NBS said that China’s economy faced “increasing difficulties and challenges” in the third quarter, as the global pandemic situation remained complex and uncertain, and the domestic economic recovery was uneven and unbalanced.
Exports lose steam amid global headwinds
One of the main drivers of China’s economic growth, exports, has lost momentum in recent months due to various factors, such as the resurgence of Covid-19 cases in some regions, supply chain disruptions, rising costs, trade frictions and geopolitical tensions.
China’s exports fell by 8.8 per cent year-on-year in August, the fourth consecutive month of decline, according to the General Administration of Customs. The drop was sharper than the market consensus of a 7.5 per cent decrease, and contrasted with the 27.1 per cent increase recorded in July.
The decline in exports was mainly due to weak demand from major trading partners, such as the United States, the European Union and Japan, as well as some emerging markets that were hit by the Delta variant of the coronavirus. Moreover, China faced a shortage of shipping containers and rising freight rates that hampered its export competitiveness.
Property sector faces a deepening slump
Another key pillar of China’s economy, the property sector, has also been under pressure as the government tightened its regulatory measures to curb excessive leverage and speculation. The sector accounts for about a quarter of China’s GDP, directly or indirectly, and has significant spillover effects on other industries, such as construction, steel, cement and furniture.
China’s property investment grew by 1.2 per cent year-on-year in the first eight months of 2023, slowing from the 4 per cent increase in the first seven months, according to the NBS. The growth rate was the lowest since February 2020, when the sector was severely affected by the Covid-19 lockdowns.
The property market also witnessed a sharp drop in sales and new construction starts, as well as a surge in defaults and debt risks among some highly leveraged developers. The most prominent case was Evergrande Group, China’s largest property developer by sales, which has been struggling to repay its debts of more than $300 billion and avoid a potential collapse that could have systemic implications for the financial system and the economy.
More stimulus measures are needed to boost growth
In response to the slowing economic growth and rising downside risks, China has introduced some stimulus measures to support consumption, investment and employment. For example, the central bank cut the reserve requirement ratio (RRR) for banks by 0.5 percentage points in July, releasing about 1 trillion yuan ($155 billion) of liquidity into the banking system. The government also issued consumption vouchers, increased fiscal spending on infrastructure projects and social welfare programs, and eased some restrictions on property purchases.
However, some analysts believe that more stimulus measures are “desperately needed” to prevent a further slowdown and ensure a stable recovery. They suggest that China should adopt a more proactive fiscal policy and a more accommodative monetary policy to boost domestic demand and ease financial stress.
Some possible options include cutting interest rates, expanding fiscal deficits, issuing more special bonds for local governments, providing tax relief for businesses and households, increasing subsidies for low-income groups and small firms, and accelerating green investment and innovation.