China is officially targeting GDP growth of “around 5%” in 2023. The world’s second-largest economy expanded at only 3% last year amid its controversial zero-COVID policy but reversed the policy late last year. Meanwhile, after a flurry of weak economic data several brokerages have raised concern over China’s growth outlook and expect it to miss the 5% growth forecast.
China’s recent economic data showed that its economic rebound continues to falter. The country’s retail sales rose 2.5% in July while analysts expected them to grow 4.5%. Similarly, industrial production rose 3.7% which was below the 4.4% that analysts expected.
Chinese economic data has disappointed markets
The country’s fixed asset investment increased 3.4% in the first seven months of 2023, again below the 3.8% that analysts expected. While the rest of the world is still battling higher inflation despite multiple rate hikes, China is instead facing deflation and its CPI fell 0.3% YoY in July while wholesale inflation dipped 4.4%.
In its release, China’s National Bureau of Statistics said, “Generally speaking, in July, the national economy continued to recover with the high-quality development making solid progress. However, we should be aware that the international political and economic situation is intricate and complicated, while the domestic demand remains insufficient and the foundation for economic recovery needs to be further consolidated.’
It also talked about more support for the economy and said, “We must intensify the role of macro policies in regulating the economy and make solid efforts to expand domestic demand, shore up confidence and prevent risks.”
Brokerages lower 2023 GDP forecast for China
Meanwhile, brokerages doubt that China would be able to meet its 5% GDP forecast for 2023 after most economic data show that the country’s economic rebound is sagging.
Nomura for instance is doubtful that China’s economy would grow 5% in 2023 and said that it sees “downside risks” to its forecast of 4.9% annualized growth in the back half of the year. Nomura’s Chief China Economist Ting Lu and a team said in their report “In our view, Beijing should play the role of lender of last resort to support some major developers and financial institutions in trouble, and should play the role of spender of last resort to boost aggregate demand.”
Nomura is hardly the only brokerage that is raising an alarm over China’s growth outlook. Tao Wang, head of Asia economics and chief China economist at UBS Investment Bank said, “Prolonged weakness in property construction will add to destocking pressures in the industrial space and depress consumption demand as well.”
Barclays expects Chinese GDP to increase by 4.5% in 2023
She added, “In such a case, economic momentum may stay subdued for the rest of the year and China may miss this year’s growth target of around 5%.”
JPMorgan and Barclays also lowered China’s growth outlook and the latter expects the world’s second-largest economy to grow 4.5% in 2023. Notably, Barclays is anyways among the most pessimistic on China’s 2023 growth outlook and said in its note, “Our 2023 GDP growth forecast is already at the lower bound of analysts’ forecasts, but we think the weaker-than-expected growth momentum in major economic indicators suggests our forecast of a 4.9% expansion this year is becoming increasingly difficult to reach.”
Incidentally, multiple brokerages including Bank of America, Barclays, Standard Charted, Goldman Sachs, and JPMorgan Chase had lowered China’s GDP forecast in July as well.
Along with slowing domestic demand, China is also battling a slowdown in exports which have fallen in double digits for the last two months.
China exports fall sharply
Last month, China’s Commerce Ministry admitted that its exports sector, which is a key driver of its economy, has been hit due to what it described as “politicization of trade.”
According to CNBC translation, Li Xingqian, the head of the ministry’s external trade department said, “Some countries’ forceful push for ‘decoupling,’ ‘severing [supply] chains’ and so-called ‘de-risking’ are human-made obstacles blocking normal commerce.”
Notably, several countries, especially the US and India have been looking to diversify their supply chains. While the US started cracking down on imports from China under former President Donald Trump, who imposed tariffs on billions of dollars of Chinese goods, the process continued under the Biden administration.
The COVID-19 pandemic also exposed the vulnerabilities of the US supply chain and the country’s overreliance on imports from China. China’s controversial zero-COVID policy was among the reasons behind the shortage of several products in the developed world.
Several US companies have diversified their supplier base from China and have increased sourcing from other Asian markets. Apple for instance is increasing its focus on India and its leading supplier Foxconn is expanding its production capacity in India.
China has cut rates
Notably, China cut key interest rates earlier this week amid a slowing economy. Louise Loo, lead economist at Oxford Economics said that recent economic data from China has been “horrible.”
She stressed, “In a crisis such as this … you can’t really call it a consumption crisis or investment crisis. It’s really a confidence crisis.” Loo added that China has been looking at “targeted” and “specific” stimulus to revive the economy and said, “Is that really enough to lift consumer sentiment, business sentiment? I really don’t think that they’ve been doing enough in that front.”
US-China trade war
Meanwhile, over the last few months, China has taken several decisions which show that the country is now warming up to the tech sector. It allowed the downloads of Didi apps, approved Ant Financial’s request to raise capital, and also announced overseas listing rules for domestic companies.
The country has also hosted multiple business leaders including Apple’s Tim Cook and Tesla’s Elon Musk this year, in an apparent bid to attract more investments and reaffirm its position as an attractive outsourcing hub.
However, for now, the Chinese economy seems to be battling a worsening slowdown in growth, and trade tensions with its major trading partners especially the US are not helping matters.
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