China: Uneven recovery

The favourable 1Q GDP print is consistent with acceleration of March data, reaffirming normalization is on track steadily.
Group Research, Samuel Tse18 Apr 2023
  • Real growth accelerated from 2.9% YoY in 4Q22 to 4.5% in 1Q23. However, the recovery is uneven
  • Recovery of retail sales was attributed to low-base comparison
  • State investment continued to drive headline investment growth
  • External headwinds will somewhat constrain production recovery
  • The PBoC will likely start cutting rates after the Fed pauses hiking in May
Photo credit: Adobe Stock Photo

The favourable 1Q GDP print is consistent with acceleration of March data, reaffirming normalization is on track steadily.  The economy accelerated from 2.9% YoY in 4Q22 to 4.5% in 1Q23. On QoQ basis, it rose by 2.2%. This is in line with our projection.  The recovery is unevenly distributed, however.

Base effect driven retail sales growth

Retail sales advanced 10.6 % YoY in March, up from 3.5% in Jan-Feb as evidenced by normalized domestic flights/subway traffic.  Performance of services sector was favourable. Catering leapfrogged by 26.3%; sales of clothing and jewelry soared by 17.7% and 37.4% respectively. However, this was due to base effect from the severe lock down last March. Also, sales of durable goods such as home appliances and decoration were sluggish. Elevated new deposits implied full potential of consumption power has yet to be unleashed.

Restored domestic production

Factory production improved from 2.4% YoY in Jan-Feb to 3.9% in March. Manufacturing PMIs continued to expand, and logistics has largely normalized.Daily railway freight traffic returned to 3.5% above pre-COVID level. Nonetheless, the road to recovery is clouded by languishing overseas demand. Daily international cargo flight was 21% below the average 2H22 level in March. In fact, positive economic surprise has been retreating since the US and European banking crisis. Contracting PPI also suggested industrial performance will likely remain tepid.

Investment growth divergence

Fixed asset investment eased from 5.5% YoY YTD in Jan-Feb to 5.1% in Mar. State investment, which grew by 10.0%, remained as the core growth driver. Growth of infrastructure, and electricity & gas were much faster than the headline figure. Thanks to Beijing's efforts in developing tech hardware and NEVs, investment in computer and communication, as well as automobiles, has leapfrogged by 14.5% and 19.0%, respectively.

Private sector investment barely grew by 0.6% YoY YTD in the first quarter. The contraction of real estate investment has slightly extended from 5.7% in Jan-Feb to 5.8% in Mar. Weekly primary market transaction is still 40% below the peak of 2021. Yet, signs of recovery should become more apparent in the coming months. Developers are showing stronger investment appetite. Bought-in rate of land auctions fell substantially from 2022 average of 15% to merely 2% in 1Q23. Percentage of land sold at premium and price cap rose from 26% and 21% to 41% and 32% respectively.

Improving credit; neutral monetary policy

Amelioration in credit growth was solid, driven by ongoing state investment. Outstanding loans grew by 11.8% YoY in March, largely in line with M2 growth of 12.7%. New loan corporate loan soared by 27.0% in 1Q, with mid-long-term credit leapfrogged by 69.1%. Reflecting the rising loan demand, interbank rates such as R007 and DR007 rebounded from the trough of 1.49% and 1.36% in Aug22 to 2.58% and 2.06% of late respectively.

To be sure, the authority will likely maintain a neutral monetary stance in the near term to prevent an overheating scenario - The new administration under Premier Li Qiang maintained a relatively conservative GDP growth target of “around 5%” this year despite a low base comparison. As such, the PBoC kept the 1Y MLF rate at 2.75% yesterday and withdrew RMB1091bn from the system through Open Market Operation in April.

Exchange rate volatility is another concern of the central bank. As market panic caused by US banks fallout eased, the Fed is now on track with another 25bps hike in the next FOMC meeting in May. That said, the PBoC will only push forward another round of rate cut or RRR cut thereafter to avoid depreciation pressure on CNY exchange rates.

To read the full report, click here to Download the PDF.  


Samuel Tse 謝家曦

Economist - China & Hong Kong 經濟學家 - 中國及香港

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