A Strong Rebound of Chinese Economic Growth in 2023
China’s GDP growth reached 3.0% in 2022，significantly below the potential growth rate. The negative output gap resulted from both external and internal pressures. For external factors，the sudden breakout of Russia Ukraine conflict，the seven federal funds rate hikes and the reversal of quantitative easing policy all played important roles. Major internal factors included the repeated worsening of COVID-19 pandemic，the contraction of domestic demand，the negative impact on the profit margins of industrial enterprises，and the weakening expectations of households and businesses.
Due to sluggish economic growth，China's inflation rate was fairly moderate. The year-over-year (YoY) headline and core CPI growth was only 1.8% and 0.7% in December 2022，compared to US 6.4% and 5.7% in the same period. What China worried is unemployment pressure. Although the overall urban survey unemployment rate was only 5.5% in December 2022，the sub-index for the 16-24 age group reached 16.7%.
The Rise of the East and the Decline of the West in 2023
In 2023，global economic growth faces a strong headwind. According to IMF projections for January 2023，world economic growth will fall from 3.4% in 2022 to 2.9% in 2023，and growth in advanced economies will decline from 2.7% in 2022 to 1.2% in 2023. GDP growth in the US，Eurozone and UK in 2023 will be 1.4%，0.7% and -0.6% respectively，all down from 2022. Global aggregate demand will decline due to the contraction in collective monetary policy in the major developed economies. The evolution of the Russian-Ukrainian conflict will bring more uncertainties to the international geopolitical context and global commodity markets. More emerging and developing countries may experience financial crises as a result of large short-term capital outflows and substantial domestic currency depreciations.
As for China’s economic outlook in 2023，I believe there will be a strong rebound. The GDP growth in 2023 will be around 5.5%，much higher than 3.0% in 2022. Although the external demand is turning weak which is not good for export，the domestic consumption and investment growth will return to the pre-pandemic level gradually.
Consumption and Investment Going Up，Exporting Going Down
In 2022，following the outbreak of the COVID-19 pandemic in spring and autumn，YoY consumption growth turned negative in both Q2 and Q4. On the one hand，due to the negative impact of the pandemic and related control measures，both urban and rural household income growth declined，particularly for the people working in service sector. Consumer confidence，on the other hand，fell sharply after the prolonged epidemic，frequent home quarantine and the outbreak of external geopolitical conflict.
The Chinese government lifted epidemic control measures in December 2022. In 2023，society as a whole will gradually return to normal，which is good news for consumption. Consumer-facing sectors such as hotels，catering，airlines and entertainment will become the main beneficiaries of the reopening. Companies in these sectors will recruit more workers，who will obtain more income. Given that many rural labors work in the service sector and have a higher marginal propensity to consume，the reopening and recovery of the service sector will promote consumption growth in 2023. Moreover，the recovery in the service sector and rising personal incomes will boost consumer confidence.
However，for the most vulnerable families which got a heavy blow by the pandemic，the re-start of domestic economy itself cannot help them get back to welfare state before 2020. To assist them resume consumption again，the Chinese government should provide them with more fiscal subsidies，in the form of cash subsidy or consumption coupons. In the past，most of the government’s fiscal transfers went to businesses. In the future，to better stimulate domestic consumption，more fiscal transfers should be made to low-income families.
The overall fixed asset investment grew at 5.1% in 2022. There are three major investments in China，namely manufacturing，property and infrastructure. Each of them had a different trajectory in 2022 and will have a different outlook in 2023.
Manufacturing investment growth reached 9.1% in 2022. On the one hand，weak domestic consumption and frequently production stoppages during the pandemic discouraged enterprises from investing more in capacity-building. On the other hand，strong export growth has led to more investment in foreign market-oriented companies. Moreover，PPI growth fell significantly in 2022，while the global commodity prices surged at the same time. As a result，the profit margins of Chinese industrial enterprises have shrunk，depressing their willingness to invest. Finally，the Chinese government offered a large value-added tax rebate to industrial companies，which helped stabilize manufacturing investment.
In 2023，the manufacturing investment may grow by around 10%. The gradual recovery of domestic demand will help stimulate domestic market-based investment. However，the rapid weakening of global growth will depress external market-oriented investment. Due to fiscal balance pressure，the value added tax (VAT) rebate to industrial enterprises might decline to some extent. Overall，manufacturing investment growth is likely to rise very slightly.
Property investment growth fell 10% in 2022，due to the very strict control of property developers' financing from both the demand side and the supply side. In 2021，China Evergrande Group almost went bankrupt. More top property developers would default on bank lending or bond financing if there were no policy easing in the second half of 2022. All types of property developers faced very serious funding constraints，and their rational responses were cutting new project investments.
The Chinese government relaxed financing controls on property developers in November 2022. Under the so-called three arrows on property financing，controls on bank lending，bond financing and equity financing were all eased. However，the expectations of both property developers and potential buyers have already changed significantly. For developers，they don’t know whether policy easing is temporary or permanent. For potential buyers，they don’t think property prices will continue to rise. As a result of the expectation changing，it is reasonable to predict that while policy easing could help contain the systemic financial risk in the property sector，it could not boost property sales or new investment，particularly in 2023. When property developers get new bank loans，they tend to use them to pay off existing loans，rather than using them to finance new projects. In conclusion，property investment growth in 2023 will be better than 2022，but we could not see a strong rally.
Infrastructure investment grew 9.4% in 2022. In the second half of 2022，infrastructure investment became the most important impetus to stabilize economic growth. In China，infrastructure investment was dominated by local governments and thus had a countercyclical character. However，given the high level of local government and the tight control over the growth of new implicit liabilities，it has been difficult for local governments to raise sufficient funds for new infrastructure projects. Fortunately，the central government implemented a new financing program for local government in the second half of 2022，namely a policy-based development financial instrument. This instrument was a fund-raising mechanism provided by the China Development Bank and the Agricultural Development Bank of China. Because financing from this instrument could be used as capital for new projects，the new financing mechanism made an important contribution to the rebound in infrastructure investment in Q3 and Q4 of 2022.
In 2023，infrastructure investment will continue to grow at a rapid pace. Given that the recovery in consumption and manufacturing investment is expected to be moderate and export growth，in particular，is declining，local governments continue to rely on infrastructure investment to promote economic growth. Moreover，both economic restructuring and industrial upgrading require the support of new types of infrastructure construction. To ensure that investment is adequately funded，fiscal policy should be more inclusive，local governments should be empowered to issue a wider range of special purpose bonds，and policy-based development financial instruments should continue to be utilized.
Export growth was strong during the pandemic for two reasons. First，exports of medical materials and equipment and remote working equipment performed fairly well during the global pandemic. Second，the COVID-19 outbreak in China was earlier than that in other countries. Therefore，when other countries were hit by the epidemic，they found that they could only import from China，because Chinese enterprises had already reopened.
The outlook for export growth in 2023 is bleak. As a result of collective monetary policy contraction by major advanced economies，global economic growth will decline significantly. When extern