China Economic Roundup – August 2023

China’s economic data for August 2023 indicates an encouraging trend towards stabilizing growth and suggests improving conditions. Surpassing expectations, industrial output and retail sales have exhibited robust growth, instilling renewed confidence in the Chinese economy’s ability to achieve its annual growth target. Nevertheless, challenges persist in sectors such as real estate and trade.

China’s National Bureau of Statistics (NBS) has released the key economic indicators for August 2023. Key indicators across manufacturing, services, consumption, investment, and international trade remained positive overall, showing higher growth rates compared to those recorded for July 2023.

According to analysts at Bloomberg, August’s data indicate that China’s economic situation may be gradually improving, providing hope that the worst of this year’s economic decline could be behind us. Increased spending on travel and accommodations during the peak summer holiday season has contributed to a positive trend, offering a glimmer of optimism for the economy. Additionally, the government’s proactive approach to issuing more special local bonds to finance infrastructure projects has provided vital support to the construction sector, which is grappling with difficulties stemming from the ongoing real estate downturn.

In a press conference for the release of the August 2023 statistics, the Spokesperson for the NBS, Fu Linghui, stated that “the [Chinese] economy has seen sound recovery with solid progress in high-quality development”.

However, he also acknowledged that “there are still challenges for the country, which faces a lackluster global economy and domestic structural problems” and that,  although China’s economic recovery is stabilizing well, it still needs further “adjustments.”

China’s economic recovery following the pandemic has raised concerns, especially since the second quarter of 2023. The deceleration can be primarily attributed to persistent challenges within the real estate sector. Furthermore, exports, traditionally a major catalyst for China’s economic growth, have contracted due to diminishing global demand for Chinese goods. While Fu acknowledged declines in sales and investment, he expressed confidence that the property sector would rebound as recent policy initiatives start to take effect.

Overview of key China economic indicators: August 2023

China experienced an acceleration in growth across almost all major economic indicators in August, driven by increased summer travel and a more robust stimulus effort. These factors contributed to higher consumer spending and factory production.

Service sector and consumption rebound

On the supply side, the Index of Services Production (ISP) grew by 6.8 percent year-on-year in August, 1.1 percentage points faster than in July. The ISP measures the change in price-adjusted output of the service industry in the reporting period relative to the base period.

China’s August economic data also included a breakdown of various service industry segments, including:

• Hospitality and catering, which grew 16.1 percent year-on-year;
• Information transmission, software, and IT, up 11.5 percent year-on-year;
• Transport, storage, and post services, which grew 9.0 percent year-on-year;
• Leasing and business services, up 8.1 percent year-on-year; and
• Financial intermediation, which increased 7.2 percent year-on-year.

Service sector activity indices also recorded an expansion, with the Business Activity Index for Services at 50.5 percent, and the Business Activity Expectation Index for Services at 57.8 percent. A reading of over 50 percent indicates an expansion.

Of these, the business activity indices of railway transportation, air transportation, accommodation, catering, telecommunication, broadcast, television and satellite transmission services, ecological protection and public facilities management, and culture, sports and entertainment, were all above 55 percent, indicating a substantial level of growth

On the consumption side, retail sales of consumer goods surpassed forecasts in August, up 4.6 percent year-on-year to reach RMB 3.79 trillion (US$527.4 billion), 2.1 percentage points higher than July. This growth was aided by the summer travel season and it marked the sharpest rise in the sector since May 2023.

Consumption in certain sectors, kept rising significantly in August, whereas others experienced more modest growth:

• Catering revenue reached RMB 421.2 billion (approx. US$58.6 billion), up 12.4 percent.
• Retail sales of goods reached RMB 3.37 trillion (approx. US$468 billion), up 3.7 percent year-on-year.
• Of the total retail sales of commodities by businesses above a designated size (annual main business income of over RMB 20 million):
• Retail sales of cosmetics went up by 9.7 percent year-on-year;
• Retail sales of communication equipment grew by 8.5 percent year-on-year;
• Retail sales of gold, silver, and jewelry increased by 7.2 percent year-on-year; and
• Retail sales of furniture grew 4.8 percent year-on-year.

Meanwhile, online retail sales reached RMB 9.53 trillion (approx. US$1.32 trillion) in August, a year-on-year increase of 12.1 percent. Of this, online sales of physical goods amounted to RMB 7.98 trillion (approx. US$1.09 trillion), accounting for 26.4 percent of total retail sales. Between January and August 2023, the retail sales of services increased by 19.4 percent, compared to the same period in the previous year.

Manufacturing output surpasses expectations but high-tech value-add soars

Industrial output accelerated significantly in August, surpassing both 3.9 percent forecast and 3.7 percent growth rate from July. The total value added of industrial enterprises above a designated size (those with a main annual business income of above RMB 20 million) increased by 4.5 percent year-on-year, 0.8 percentage points higher than in July. Month-on-month, the value-add grew by 0.50 percent.

Value-add growth across the three major industries was as follows:

• The mining industry increased by 2.3 percent year-on-year;
• The manufacturing industry grew by 5.4 percent year-on-year;
• The production and supply of electricity, heat, gas, and water increased by 0.2 percent year-on-year; and
• The equipment manufacturing increased by 5.4 percent year-on-year, 2.1 percent faster than in the previous month.

The value-add of foreign-invested enterprises grew by 0.8 percent year-on-year, while private enterprises grew by 3.4 percent.  However, it is to be noted that the value added of state-owned enterprises (SOEs) outgrew private businesses in this regard, increasing 5.2 percent year-on-year.

Certain market segments experienced exceptional growth booms in August. These were mostly high-growth technology industries, with solar cells, service robots and optoelectronic devices increasing by 77.8 percent, 73.7 percent, and 29.9 percent, respectively, compared to the same period last year.

High-tech segments keep strong investment levels

Fixed asset investment (excluding rural households) between January and August reached RMB 32.7 billion (US$4.5 billion), an increase of 3.2 percent compared to the same period last year, but a slight decrease of 0.2 percentage points compared to the previous seventh month of 2023.

By sector, infrastructure investment saw fairly robust growth at 6.4 percent year-on-year, while manufacturing investment grew by 5.9 percent. Real estate development investment, however, declined drastically by 8.8 percent.

Secondary industries saw the highest growth in investment at 8.8 percent year-on-year, compared with a decline of 1.3 percent in the primary industries and a modest 0.9 percent increase in tertiary industries.

High-tech industries continued to attract high levels of investment, growing 11.3 percent year on year. Several high-tech sub-sectors experienced very high levels of growth, including:

• Investment in medical equipment and instrument manufacturing increased by 17.5 percent;
• Investment in electronic and communication equipment manufacturing increased by 12.8 percent year-on-year;
• Investment in technology transfer services increased by 42.1 percent year-on-year;
• Investment in professional technical services increased by 28.3 percent year-on-year; and
• Investment by private companies decreased by 0.7 percent year-on-year.

Foreign investment declines

According to the data released by China’s Ministry of Commerce (MOFCOM), from January to August 2023, China absorbed a total of RMB 847.17 billion (US$117.88 billion) in foreign investment. However, this figure shows a 5.1 percent year-on-year decrease, reflecting a decline in foreign capital inflows during this period. This decline could be attributed to various economic factors and challenges, including ongoing real estate issues and global economic uncertainties.

Despite the overall decrease in foreign capital absorption, there is a notable surge in the establishment of new foreign-owned businesses in China. A total of 33,154 new foreign-invested enterprises were set up during this eight-month period, marking an impressive 33 percent year-on-year growth. This uptick in new foreign businesses reflects a continued interest in the Chinese market and a willingness to invest in the country’s diverse economic sectors.

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One particularly encouraging aspect of the data is the growth in foreign investment within the manufacturing sector. The actual use of foreign capital in manufacturing reached RMB 239.95 billion (US$33.39 billion), representing a notable 6.8 percent year-on-year increase. This suggests that foreign investors continue to see opportunities in China’s manufacturing industry, despite the broader economic challenges.

Trade volumes are better than expected, although the slump persists

Between January and August, overall imports and exports reached RMB 27 trillion (approx. US$3.75 trillion), just a 0.1 percent decline from the same period in the previous year. In August, the total value of goods imports and exports reached RMB 3.58 trillion (approx. US$498.17 billion), down 2.5 percent year-on-year. However, the decline narrowed 5.8 percentage points compared to July.

Of this, exports amounted to RMB 2.03 trillion, down 3.2 percent year-on-year, while imports reached RMB 1.5 trillion, down by 1.6 percent year-on-year. The trade surplus was RMB 488 billion (approx. US$67.9 billion).

However, imports and exports by private enterprises grew by 0.6 percent year-on-year, accounting for 52.9 percent of the total value of imports and export, 3.0 percent higher than the same period last year.

In August, China experienced a 13.3 percent decline in its exports to Southeast Asia, coupled with a 6.1 percent reduction in imports from the region compared to the same period last year. These figures, however, represent an improvement compared to the performance observed in July.

While the automobile sector continued to shine in terms of exports, its growth saw a deceleration in August. Data from customs authorities indicated that exports from this sector increased by 69 percent in the first eight months of this year compared to the same period in 2022. However, this growth rate represents a slight slowdown from the 74.1 percent increase reported between January and July.

Interpreting the August data: Signs of improvement amid ongoing challenges

The economic data released for China in August offers a mixed picture, providing both signs of improvement and indicative of ongoing challenges. While some data points suggest that growth may be stabilizing, particularly in industrial production and retail sales, the persistent issues in the real estate sector remain a cause for concern.

Despite the mixed showing, Asian stock markets rallied following the release of China’s August 2023 economic data, suggesting that investors have found reason to be optimistic. Beijing’s initiatives to stimulate the economy and stabilize financial markets are seen as promising.

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As noted by Larry Hu, chief economist for Greater China at Macquarie Group, there is a sense that the worst may be over, but the pace of recovery is expected to be modest. Confidence among business owners and consumers remains low, and the real estate sector’s woes continue to cast a shadow. The Chinese government’s policies and base effects could lead to improved headline growth numbers, but the road to a full recovery is likely to be gradual.

Proactive measures to boost the economy

In response to the ongoing economic challenges and concerns about the slowdown in China’s economy, the government has been implementing a series of policy measures aimed at supporting growth and improving liquidity in the financial system.

One of the most recent and surprising moves came from the People’s Bank of China (PBoC), which made an unexpected cut to the reserve requirement ratio (RRR) for banks. This policy change took effect on September 15, 2023, and marked a significant step in the government’s efforts to bolster the economy. The RRR was reduced by 25 basis points for all banks, except for those that had already implemented a 5 percent reserve ratio. It’s worth noting that the PBOC had previously made a similar 25 basis point cut to the RRR for most banks back in March.

This decision is projected to inject more than RMB 500 billion (approximately US$69.65 billion) into the market, to lower the financial burden on market participants.

Meanwhile, the government has been taking proactive steps to attract foreign investment in the country. At the end of August, a new set of opinions was released, outlining suggestions aimed at boosting foreign direct investment (FDI) in China. These suggestions cover a wide range of areas, including improving intellectual property rights protection and facilitating cross-border data flows.

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In addition to these policy proposals, the Chinese government has been actively working to build the confidence of foreign-invested enterprises (FIEs) since the lifting of COVID-19 restrictions in late 2022. Despite a decline in the actual use of foreign capital in China during the first half of 2023, there has been a notable increase in the number of newly established FIEs. This suggests that foreign companies are still bullish about the Chinese market, even if the total foreign capital amount has decreased.

Such actions reflect the government’s determination to stimulate economic recovery and enhance the overall financial liquidity within the country. They are part of a broader strategy that has been unfolding since April, as the momentum from a strong start to the year began to wane.  While inflation remains relatively low compared to many other major economies, the government is implementing measures tailored to the unique challenges facing China’s industrial and consumer sectors.

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