China’s Stronger Recovery Likely In Second Half – Analysis

Setting aside international doom-and-gloom narratives, China’s economic recovery is likely to strengthen in the second half of the year. 

According to latest data, China’s GDP expanded 5.5 percent in the first half of the year. 

As the US is at the edge of a recession, which Eurozone is already tackling and Japanese growth remains around 1%, China is still growing 4-5 times relatively faster. That’s not a bad performance in the dire international status quo. Consequently, the International Monetary Fund projects China’s share of global GDP continues to rise to 18.4 percent this year.

Why did international prognostications go wrong, once again?

GDP growth close to target 

Has the global turmoil pushed China into recession, as some international headlines suggest? The simple answer is: No.

In March, China’s government work report set a GDP growth target of “around 5 percent” for 2023. The projection was at the lower end of expectations. After three years of pandemic-induced economic slowdown and half a decade of trade and technology wars, caution was warranted especially as international headwinds are penalizing growth around the world. 

According to the National Bureau of Statistics, China’s economy expanded by 6.3% in the second quarter from a year earlier, fueled by recoveries in retail sales and the service sector, and partly due to a low base effect. 

The total value added of the industrial enterprises grew by 3.8 percent year-on-year in the first six months, reflecting recovery of industrial production and improved business expectations. Importantly, strong gains marked advanced green energy-related production, including electric vehicles, solar batteries, and power generators.

Uncertain times, cautious consumption   

Is Chinese economy in the deflation zone, as some headlines suggest? The short answer is: No. But some international pundits may have been in the twilight zone.

In June, the Consumer Price Index (CPI), a main gauge of inflation, stayed flat on a yearly basis. But excluding prices of food and energy, core consumer prices actually continued to rise moderately. Furthermore, fuel price disinflation, a key factor behind subdued headline inflation, is likely to wane over the coming months. 

In fact, the CPI is expected to pick up in August and then stay around 1 percent by the end of the year. After three years of Covid-19 constraints, many consumers are not likely to stick to the old purchasing patterns. People don’t purchase what they want; they buy what they need. 

Nevertheless, retail sales of consumer goods jumped by 8.2 percent year-on-year in the second quarter, an increase of 2.4 percentage points relative to the first quarter. 

In the past few months, prices have shown a downward trend, but not deflation, as Liu Guoqiang, vice governor of the People’s Bank of China (PBC), said on Friday. The post-pandemic normalization may take about a year.

Trade resilience amid the West’s protectionism

Are China’s exports at the verge of decline, as some headlines suggest? The short answer is: No.

In the first six months of the year, China’s import and export volume of goods rose to $2.8 trillion, up 2.1 percent year on year. According to the General Administration of Customs, exports increased by 3.7 percent, while imports declined 0.1 percent year-on year. 

After half a year of the pandemic after-effects and misguided trade and technology wars, China’s exports surplus reflects resilience. The mild decline in imports can be seen in the context of efforts at self-sufficiency, due to protectionism in the West. 

The trade data illustrates increasing regionalization and South-to-South trade. Over the period, the ASEAN was China’s largest trade partner, with bilateral trade up 5.4 percent year-on-year, whereas China’s trade with the EU rose by 1.9 percent year-on-year. Most pertinently, China’s trade with countries and regions along the Belt and Road Initiative jumped 9.8 percent year-on-year in the first half.

By contrast, trade with the US contracted by 8.4 percent. According to the Dallas Federal Reserve, to the degree Mexico’s rise in the US trade rankings is reflects US-Sino friction, “the higher profile comes at a cost to US firms and consumers through higher input and purchase prices.” 

Broader recovery in the second half

Is China’s economy at the edge of recession, as some headlines suggest? The clear answer is: No.

Even though China’s economic output potential is constrained by unwarranted external constraints, the country’s economic recovery continues amid international headwinds. 

Additionally, fixed-asset investment grew steadily by 3.8 percent year-on-year. In particular, the state investment focuses increasingly on advanced manufacturing technology, semiconductors, as well as big data centers and environmental sectors. 

The real estate sector is recovering but slowly. In November, authorities launched a 16-point plan to revive the sector. Some measures will be extended until the end of 2024.

Recently, Chinese Premier Li Qiang pledged timely “targeted and coordinated policy support” for the economy. On the monetary side, China’s central bank has eased rates in the past and embarked on another round of cuts in June. 

There is broad expectation for a slate of accommodative measures from the Politburo meeting later this month. Recently, Chinese President Xi Jinping promoted efforts to lift the country’s opening-up to a new level. That could be a prelude of things to come. 

In a benign scenario, the full-year GDP growth could exceed 5.0 percent year-on-year.

The original commentary was published by China Daily on May 19, 2023.