China’s Economic Review and Outlook
After a rocky start to 2023，China's economy bounced back in the third quarter. In this article，we review the ups and downs of the first three quarters of 2023 and give an economic outlook for the rest of the year through 2024.
The Chinese economy had a tough first half in 2023，but we believe the primary problems came more from fluctuations in the supply side rather than falling demand. Specifically，the way companies managed their inventories made the state of the economy seem worse off than it actually was.
The Chinese economy was anticipated to rebound strongly in 2023，following the announcement of COVID-19 control policy adjustments in December 2022. This optimism prompted businesses to increase inventories at the beginning of the year. The official Purchasing Managers' Index (PMI) for February 2023 revealed that both factory output and new orders had entered expansionary territory. However，production had outpaced new orders，suggesting a swifter recovery in supply compared to demand.
However，as external shocks hit the economy in the second quarter，the economic picture became increasingly uncertain. With demand falling short of expectations and considering the increase in inventories from the previous quarter，the excess supply put downward pressure on prices，prompting businesses to swiftly reduce their inventories. Consequently，production in both industrial and service sectors declined year over year in April and May. Importantly，this decision to withdraw supply magnified the negative outlook for economic performance. As final demand weakened，it led to progressively larger fluctuations in demand at the supplier level further upstream，a phenomenon known as the Bullwhip Effect. This coupled with deflationary pressures，heightened the perception of weaker demand，depressing consumer sentiment and impacting the capital market.
In the third quarter，the Chinese government stepped up policy support. These actions ranged from monetary measures to fiscal support. Consequently，prices rose again，alleviating the pressure on firms to reduce inventories and thereby boosting production. By the end of the third quarter，the economy had rebounded to a 4.9% year-over-year growth rate.
In the third quarter，there was a significant increase in policy support. On July 24，the Politburo meeting emphasized the importance of utilizing policy space，calling for strengthening macro-policy regulation，and bolstering counter-cyclical adjustments and policy reserves. Meanwhile，the meeting proposed to effectively avert and address the risks associated with local government debt through a comprehensive package of measures. Starting in late August，various policies across multiple sectors began to take effect. In terms of monetary policy，the People's Bank of China (PBOC) conducted medium-term lending facility operations，lowering interest rates from 2.65 to 2.5 percent. Additionally，major state banks lowered interest rates on existing mortgages for first-home loans in early September. On the fiscal policy front，government bond issuance accelerated，and increases in personal income tax deductions became effective at the end of August. Regarding the property sector，the cities of Guangzhou，Shenzhen，Beijing，and Shanghai sequentially implemented the "Recognize Houses，Not Loans" policy between August 30 and September 1. This policy recognized households with mortgage records but no local property ownership as first-time homebuyers. As for local debt，refinancing bond issuance picked up，and the PBOC pointed to the necessity of managing risks related to lending to local government financing platforms in its quarterly monetary policy report.
With substantial policy support in place，the economy bottomed out. In the third quarter，the year-over-year growth of real gross domestic product (GDP) surpassed market expectations，reaching a robust 4.9%. By the end of September，all major economic indicators，except for property investment，had shown a rebound in their year-over-year growth rates from the trough.
Improved demand mitigated the pressure on firms to reduce inventories，facilitating the revitalization of production，prices，and profits. To be specific，the steady gap between factory output and new orders in the PMI indicated a concurrent rise in production and demand. This rebalancing of supply and demand alleviated downward price pressures，leading to positive year-over-year inflation in the Consumer Price Index (CPI) by August. Despite being negative，the annual Producer Price Index (PPI) inflation has been rising steadily since June. The price recovery，particularly in the upstream supply chain，has had a positive impact on key nominal indicators. Industrial profits，for instance，saw a significant year-over-year increase of 17.2% in August.
Looking ahead to 2024，it is anticipated that several factors will contribute positively to economic growth，particularly domestic demand. However，it is essential to ensure these growth drivers remain intact and sustainable，contingent on continued policy support.
Potential Growth Drivers
We anticipate further repair and strengthening of the economic engines阅读全部文章，请登录数字版阅读账户。 没有账户？ 立即购买数字版杂志