This puts China on track to achieve its growth target of around 5% as revealed by Premier Li Keqiang during the Two Sessions in March. Nevertheless, the National Bureau of Statistics acknowledged that the “external environment is becoming more complex”, posing a threat to stable economic growth. Last year, the Chinese economy grew 5.2%.

Some analysts have attributed to the Q1 growth to industry, with industrial production up 6.1% compared to a year ago, boosted by strong growth in high-tech manufacturing for products such as electric vehicle (EV) charging stations and batteries. Chinese automakers have stepped up expansions into new overseas markets, with BYD alone exporting over 240,000 cars in 2023, according to Reuters.

Disappointing retail sales – despite two major national holidays in this period –show that China is still experiencing weak domestic demand. This is likely caused by the ongoing crisis in the property sector.

New home prices fell at the fastest rate in more than eight years in March, and sales fell 23.7%. The scale of the crisis was underlined in January when a Hong Kong court ordered the liquidation of the world’s most indebted developer, China Evergrande Group.

Economists told the Financial Times that since growth is in line with official targets, further economic stimulus measures are unlikely, but others say that more stimulus is still needed to shore up demand.

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The Q3 figure was above analysts’ expectations of 4.5% growth, but below the 6.3% growth seen in the second quarter. On a quarterly basis, China’s GDP grew 1.3%, accelerating from 0.5% in the second quarter.

Despite growth exceeding expectations, the National Bureau of Statistics (NBS) commented that the ‘outside environment’ is growing increasingly ‘complex’, that domestic demand remains insufficient, and that ‘growth needs to be further consolidated’.

Over the past week, the NBS also released more economic data for September and the first nine months of the year, including both good news and bad.

Retail sales — a gauge of consumption — grew 5.5% year-on-year, up from 4.6% in August, and above analysts’ expectations of a 4.9% rise. Tourism and consumption revenue from the National Day Holiday “Golden Week” in October may push this figure up in the fourth quarter results, but consumer confidence is still not rebounding as quickly as hoped, likely due to widespread concern about troubles in the property market.

As such, the consumer price index showed no change in prices, and the producer price index (PPI) fell 2.5% year-on-year — marking 12 straight months of decline. This indicates ongoing deflationary pressures and weak demand for goods and services in China’s economy.

Exports dropped 6.2%, easing from 8.8% in August and above analysts’ expectations. This improvement was due to low base effects and it being peak export season for Christmas products. Statistics show that in recent months, China has been exporting four containers of goods for each container it imports (for comparison, this figure was 2.7 prior to the pandemic).

Industrial output of everything from electric vehicles to chemicals grew 4.5%, the same as August, beating analyst predictions. The improvement has been driven by increased financing for factory construction and infrastructure projects. The government has also been pushing capital spending in areas such as high-tech manufacturing.

Analysts told Reuters that these data results show that China’s stimulus measures, though piecemeal, are broadly having an effect, and that fewer stimulus measures should be expected in the final quarter as China is on track to achieve its annual growth target.

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Although lower than the expected growth forecast between 6.7% and 7% in Q2, China’s 6.3% annual growth rate in April to June suggests that the world’s second-largest economy is continuing to heal. Nevertheless, a consensus appears to have been reached amongst economists: post-Covid momentum is faltering. The question of whether consumption can be further boosted will be key if China is to follow the trajectory of hitting its 5% full-year growth target.

Analysts from institutions including Huatai Securities, China Minsheng Bank and Zhixin Investment Research Institute believe that these figures could represent a “high point” for consumption figures due to holidays such as the May Day holiday, Dragon Boat Festival and 618 (China’s second-largest mid-year online shopping festival) driving consumption.

Much like the pattern of economic recovery, domestic consumer demand shows a bittersweet picture. Total retail sales of consumer goods in the country reached RMB 22.75 trillion (£2.47 trillion) in the first half of 2023, a year-on-year increase of 8.2%. This is reported to have contributed to 77.2% of the overall economic growth, with officials touting the efficacy of the country’s economic stimulus.

Among the sectors leading the rebound are the culture, tourism and catering industries, while categories such as automotive, jewellery and sports and entertainment are also regaining vitality, recording annual growth in May of 24.2%, 24.4% and 14.3%, respectively.

Despite consumer confidence gradually resuming, China’s record-high youth unemployment rate of 21.3%, coupled with a more cautious consumer cohort, will cast clouds over the country’s spending power in the months to come. In a McKinsey report published earlier in July, the tendency to consume lower-priced products or purchase through discounted channels was found to have remained high among Chinese consumers.

Describing sentiment in China as “cautiously optimistic”, Daniel Zipser, Senior Partner at McKinsey & Company’s Shenzhen office who leads Asia Consumer & Retail Practice and authored the July report, added that this doesn’t necessarily mean that Chinese consumers are willing to sacrifice high-end brands. The bounce back of luxury consumption in the first half of 2023 is evidence of that observation, where China has been labelled “a core contributor” to revenue growth for global luxury conglomerates, including Prada and LVMH.

International brands, meanwhile, have been regaining market share in China as the country has reopened, particularly in the categories of sportswear, beauty and infant formula. China reclaimed its title as the largest market for the Japanese beauty brand Shiseido in the second quarter. Sports giant Adidas also reported that sales in China increased by 16% in Q2 to EUR 766 million, after a consecutive decline in the past eight quarters. Several product lines have gained favour amongst Chinese consumers over the past six months, including the Cool Touch series created by Adidas’ Asia Creative Centre, as well as the X Crazyfast customised football shoes endorsed by Chinese female footballer Tang Jiali, which was released on the eve of the FIFA Women’s World Cup.

“[Consumers] want trade-up, they want to buy better products but they are not saying ‘let’s get them from a cheaper brand’. Instead, they look during the promotional seasons; they turn to different channels … for example, they are moving to livestream platforms as we found in the survey, because that’s where they find low-price-based deals”, says Zipser.

This situation means that businesses should be prepared to react to different scenarios for both mid-term and long-term prospects, Zipser tells Dao Insights. That means diversifying their plans to engage the market during the current uncertainty while also being ready to take agile actions in response to the “positive outlook” in the near future, especially considering that the percentage of China’s upper middle class (defined as households with an annual disposable income of over RMB 160,000, or £17,377.17) is expected to grow to 52% by 2025 from 41% in 2022, according to projections by McKinsey Global Institute Insights China.

Zipser also pinpointed travel scenarios as an avenue to further unleash consumption potential as tourism continues to regain traction. This would be of particular benefit to high-end brands, providing consumers with a “treasure hunting” retailing experience as they explore the world while serving as a sustainable solution for businesses to mitigate seemingly contradictory consumer psychologies.

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While growth of 6.3% may appear strong, Q2 of 2022 saw China’s economy expand by 0.4% as the country experienced severe disruption from its zero Covid policy – so Q2 of 2023 was always expected to be a higher-than-average number.

Seasonally adjusted quarter-on-quarter growth saw an expansion of 0.8%. And in nominal terms, Q2 growth was lower than Q1 at 4.8% compared to 5%, respectively.

Meanwhile, consumption, a key growth driver as China seeks to shift its economy away from supply, remains sluggish. Retail sales grew by 3.1% year-on-year in June. Again, this growth is warped by the same month in 2022, when the economy was experiencing major impacts from severe lockdowns from March through June.

The charts above and below (all taken from Caixin) reflect two further key fronts for China’s economy in 2023: real estate and youth unemployment.

Image captured from Caixin

Image captured from Caixin

Investment in property development continues to fall (-7.9%), while state-led infrastructure investment expanded by 7.2%. Residential property sales are also struggling, with pre-owned unit prices falling by 0.7% in June month-on-month, according to China’s National Bureau of Statistics. New home sales by China’s 100 biggest real estate developers fell by 28.1% to $72.5 billion (£55.3 billion) in June despite 2022 being a slow year due to zero-Covid.

Youth unemployment has now climbed to 21.4% in June, with the China Academy of Social Sciences predicting this number will peak at 23% in July as another fresh wave of graduates hits the job market.

The perennial question of ‘when stimulus’ may finally be answered in the coming weeks. And if and when that stimulus does arrive, expect to see measures introduced to support households and the private sector – both of which have borne the brunt of the economic impact of recent years.

Call +44 (0)20 7802 2000 or email enquiries@cbbc.org now to find out how CBBC’s market research and analysis services can provide you with the information you need to succeed in China.

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China’s economy grew by 3% in 2022 according to data from the National Bureau of Statistics, with H2 activity improving on the 2.5% growth in H1. While much higher than the figure recorded by the UK, this growth rate marks one of China’s worst annual performances in nearly half a century.

At the regional level, the GDP figures generally reflect the degree of impact of the zero covid policy (now a thing of the past) on each region, in addition to other factors including exports and real estate.

Beijing grew by 0.7% after experiencing heavy disruption from zero covid. Restrictions tightened ahead of the 20th Party Congress in October and then tightened further as the virus spread in November.

Shanghai’s economy contracted by -0.2% for the year, reflecting the severity of the lockdown from March to June. The city’s GDP fell by -13.7% in Q2 with Q3-4 activity failing to recover the drop.

Former heavy industry giant Jilin fared worse, contracting by -1.9% after also experiencing heavy disruption from zero covid in early 2022. Jilin’s GDP was also ultimately unable to recover from the -7.9% contraction in Q1.

However, things were not all doom and gloom. Shandong (3.9%), Fujian (4.7%) and Jiangxi (4.7%), three provinces which avoided the worst of zero covid disruption, grew significantly above the national average. These provinces perhaps give an indication of the levels of growth we can expect in 2023 (the IMF is currently predicting the Chinese economy will grow by 5.2% in 2023).

Two of China’s biggest provincial economies, Guangdong and Jiangsu, grew by 1.9% and 2.8%, respectively. These figures were significantly lower than in 2021 when growth was 8% for Guangdong and 8.6% in Jiangsu around or above the national average of 8.1%.

Jiangsu was directly impacted by the Shanghai lockdown (as was much of East China) with GDP contracting in Q2 by -1.1%. However, growth was able to recover back to within the range of the national average.

Guangdong, which has remained China’s largest province by total GDP for the last 34 years, experienced sporadic lockdowns throughout 2022, with Shenzhen experiencing lockdown in H1 and Guangzhou in H2.

Hainan (0.2%) and Tibet (1.1%), two of China’s smallest provinces in GDP terms but biggest tourist destinations, were hit by lower visitor numbers due to the wider zero covid impact on domestic travel. Hainan has also seen real estate prices fall by some of the highest levels in China.

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The National Bureau of Statistics has announced China’s Q2 GDP data, and while it is less impressive than the 18.3% year-on-year growth in the first three months of 2021, the 7.9% year-on-year increase (up to RMB 52.3 trillion) in the second quarter nonetheless indicates a steady recovery.

It also means that the Chinese government’s own modest 6% growth target for this year will be met, probably with some ease, and that higher estimates by international institutions (IMF: 8.4%; World Bank: 8.5%) remain within reach.

China’s quarterly GDP growth year-on-year (source: National Bureau of Statistics of China)

Other indicators give reason for optimism, too. Both the latest retail and export figures for June exceeded expectations. Retail was up 12.1% year-on-year, exceeding the 11% forecast by Reuters, with beverages the fastest-growing category, up 29.1% year-on-year. Retail sales grew 13.9% from April-June. Despite sporadic outbreaks of Covid-19, overall consumer confidence is slowly returning, although some analysts have noted that if domestic consumption does not keep pace with manufacturing, then companies could face inventory and liquidity problems.

As Focus noted earlier this month, in June, exports increased by 32.2% year-on-year, also exceeding expectations. Car exports in June rose by about 50% compared to the same month last year, according to the China Association of Automobile Manufacturers. With the global economy yet to recover fully, it is still unclear whether China’s export industry – and its economy in general – will receive a further boost from increasing global demand. Indeed, there are suggestions that trade may begin to slow down in the second half of the year as retailers rebuild their inventories and consumption patterns normalise. In addition, the spread of the highly transmissible Delta variant may lead to further lockdowns, which will hurt demand.

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Tom Orlik is the chief economist for Bloomberg Economics who spent more than a decade in Beijing before relocating to Washington DC. His first book, ‘Understanding China’s Economic Indicators’ was a must-have guide to China’s economic data. Now he has a new book – ‘China: The Bubble that Never Pops’ (Oxford University Press) – asking a fundamental question that just about anyone serious about understanding China’s economy, markets and data will surely have asked themselves: Will China’s economic bubble burst, how might that happen, and just where will it leave foreign businesses, China and its people? Paul French digs deeper into Orlik’s hypothesis to ascertain what exactly it is that makes China so seemingly economically robust?

We know China’s debt bubble is big – but is there any way to quantify it in understandable terms for the economic lay person?

In 2008, outstanding borrowing in China’s economy was about 140% of GDP. Now, it’s about 260%. That’s a lot of extra borrowing in a short period of time. When we look around the world, there’s basically no other country that has taken on such a lot of debt so quickly. There are, though, a lot of examples – Korea in the 1997 Asian Financial Crisis, the US in the 2008 financial crisis, Greece in the 2010 sovereign debt crisis. They took on less debt, but still had a meltdown. The fear is that China will go the same way.

You mention three previous debt crises that led to financial and social turmoil – the bursting of Japan’s bubble in 1989; the Asian Financial Crisis in 1997; and sub-prime in the US in 2008. Does China’s debt crisis have any parallels to the situation in these crises? And if not, how come it’s different?

There is a bunch of similarities. Like banks in Japan in the 1980s, China’s lenders make loans partly at the direction of the government, with the implicit guarantee that Beijing will backstop any defaults. Like Korea in 1997, China’s banks often focus on crony capitalist loans to borrowers in the same state-owned family. Like the US in 2008, there’s been excessive lending to real estate – driving house prices to artificial highs, and a lot of lending has been securitised – adding complexity and opacity to the system.

There are also two important differences, and so far they have been decisive. First, because China’s savings rate is so high, and because it’s difficult to take funds offshore, funding for the banks remains solid. For a financial crisis to happen, lenders have to run out of funds. In China, that doesn’t happen. Second, despite its rise as a global power, China is still at a relatively early stage in its development. Average incomes are low compared to the US. That’s an important contrast with Japan in 1989 – which had basically already caught up.

Because China’s savings rate is so high, and because it’s difficult to take funds offshore, funding for the banks remains solid

Japan didn’t have space to outgrow its problems. China’s not the 10%-a-year monster it was in the early 2000s, but it can still hope to grow at a rapid clip.

Xi Jinping declared a war on debt. What was his battle campaign? And did it work?

The deleveraging campaign which Xi and his chief economic advisor Liu He kicked off in 2016 was remarkable for a couple of reasons. First, it showed the government was willing to move early to address problems before they blew up. Second, it showed regulators willing and able to go into battle against some of the most powerful vested interests – the state-owned banks and the SOEs that borrowed from them. I remember visiting local banks in Henan province in 2017 when the campaign was in full swing. It really had an impact.

It’s not exactly ‘mission accomplished.’ China still has a huge burden of debt. But the campaign did notch up some wins. Shadow bank lending – arguably the riskiest part of the system – went from helter-skelter growth to contraction. And by slowing overall credit growth in the good times, China’s policy makers bought themselves a little space to allow lending to run a little faster when it’s needed. In 2020, with the Covid lockdown crushing the economy, that’s paying off.

There have been, as you note, so many “China will collapse” theories over the years – unmanageable debt, the uneasy transition from an investment to a consumption model, the demands of a rising middle class – but they’ve all been wrong so far. Why?

In 2001, Gordon Chang famously tempted fate with his book The Coming Collapse of China – ushering in close to two decades of unbroken growth. In 2020, I have tempted fate in the other direction. Perhaps I’ll have done the China ‘bears’  a favour, and the bubble will burst before the summer holidays are over. My view, though, is that China still has some years of growth ahead of it. The big reasons are the ones we already touched on.

China’s growth engine hasn’t run out of steam yet.

A high savings rate means there’s solid funding for the banks and no trigger for a financial crisis. A relatively early stage of development means there’s space for China to continue climbing the technology ladder. On economics and finance, China’s technocrats don’t get everything right, but they have proven themselves adept at managing the big challenges. Put that together and you have a growth engine that hasn’t run out of steam yet.

Tom Orlik says that China’s savers and a relatively early stage of development means there’s space for China to continue

You talk about the prevalence of shadow banking with ruinous interest rates. Why do people use these illegal banks? Is there any way to accurately estimate the size of these banks and how much they are lending?

The strange thing about China’s shadow banks is that they’re actually just the banks operating through a slightly different channel. Banks lend to a dodgy borrower – maybe it’s a high-polluting factory that the government wants to cut off; maybe they have a risk of defaulting and the bank doesn’t want to acknowledge a bad loan. Instead of breaking the relationship, the bank finds another asset manager to act as a middleman.

The asset manager makes a loan to the dodgy borrower. The bank buys a securitised claim on that loan from the asset manager. In effect, the relationship is unchanged, but it now shows up on the bank’s balance sheet as an investment rather than a loan, and that enables the bank to evade some regulatory constraints.

That kind of shadow lending activity is pretty significant. Some local lenders – like Baoshang which went bust in 2019 – do more shadow lending than regular lending. There’s also what you’d consider real shadow lenders – peer-to-peer platforms, loan sharks and the like. They’re more fun to talk to but much smaller – too small to move the dial for the economy as a whole.

Vast domestic market size, good workforce demographics, a high savings rate – all these phenomena were supposed to prevent the bubbles from bursting and seemingly did – in real estate for example. But do any of these phenomena still apply in 2020?

Demographics are not looking so great – China now has a shrinking working-age population. The savings rate is still pretty high – we’ve talked about that. The vast domestic market China still has in spades, and it’s actually incredibly important. Back in the 1990s and 2000s, a massive and cheap workforce was a lure for foreign firms. Now, labour is more expensive, but China’s growing middle class means an attractive consumer market to tap. The presence of foreign firms means an opportunity to learn from foreign technology.

The vast size of the market means once technologies are learned, they can be deployed at a world-beating scale. That – combined with a dose of domestic innovation – is how China achieved competitiveness in first textiles and toys, then steel and ships, now high-speed trains and sustainable energy.

What might change the story, and a significant risk for China going forward, is the darkening of the global mood. President Trump might be the most extreme. But other countries in Europe and Asia are now also shifting their view on China. If the door to the rest of the world starts to creak closed, export markets shrink and technology transfer slows, that’s going to be a problem for Beijing.

Tom Orlik will be hosting a CBBC Premium Webinar titled ‘China: The Bubble That Never Pops’ on Wednesday 29 July 2020. Contact isabel.curnock@cbbc.org for more information

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