China Economic Roundup – July 2023

China’s July 2023 economic data reveals persistent challenges amid its post-COVID recovery, as key indicators like foreign trade and investment signal ongoing downward pressure. Meanwhile, the Chinese government is taking proactive measures to recalibrate the situation through policy support, also seeking to improve foreign investment conditions.

China’s National Bureau of Statistics (NBS) has released the key economic indicators for July 2023, unveiling ongoing challenges amid the nation’s post-COVID recovery journey. The data, encompassing key indicators like industrial output and retail sales, underscores the persistent downward pressure encountered by the Chinese economy, even as it maintains a trajectory of revival following the three-year span of the pandemic.

Fu Linghui, spokesperson for NBS, highlighted that the broader economic trend in July displayed continued recovery and commendable strides in high-quality development. Nevertheless, he tempered this optimism by acknowledging the intricate global political and economic landscape, the insufficiency of domestic demand, and the need for bolstering the foundational elements of economic resurgence.

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Although Fu acknowledged the challenges in China’s economic rebound, he also maintained that the July slowdown in the growth rate of key indicators is a normal fluctuation inherent to inter-monthly dynamics. He emphasized positive aspects within the economy, notably the robust growth experienced by the services sector.

In the face of both domestic and external demand constraints and other obstacles, Chinese officials have publicly committed to intensifying policy support measures. Their aim is to ensure that the world’s second-largest economy can not only attain substantial enhancement in quality but also secure a sustainable growth rate. Notably reflecting this resolute stance, People’s Bank of China (PBOC), the country’s central bank, unexpectedly enacted a reduction in key policy interest rates—a move evidently designed to invigorate economic activity.

Overview of key economic indicators

China still experienced steady growth across sectors in July, but a deceleration in growth has also been observed for almost all major economic indicators.

While services and consumption continued to record considerable growth, manufacturing output growth slowed slightly from June and exports and foreign direct investment (FDI) inflows also dropped.

Meanwhile, fixed asset investment was directed to emerging pivotal sectors such as R&D and high-tech.

Service sector and consumption show sustained growth

On the supply side, the index of services production (ISP) grew 5.7 percent year-on-year in July, a slowdown of 1.1 percentage points from June. The ISP measures the change in price-adjusted output of the service industry in the reporting period relative to the base period. The ISP from January to July 2023 was up 8.3 percent year-on-year.

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

• Hospitality and catering, which grew 20 percent year-on-year;
• Information transmission, software, and IT, up 11.2 percent year-on-year.
• Financial intermediation, up 7.6 percent year-on-year; and
• Transport, storage, and post services, up 7.3 percent year-on-year.

Meanwhile, the operating income of service companies above a designated size (those with a main annual business income of over RMB 20 million, that is, approximately, US$2.8 million) grew 7.5 percent year-on-year.

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Service business activity indices also recorded an expansion, with the Business Activity Index for Services at 51.5 percent, and the Business Activity Expectation Index for Services at 58.7 percent. For these two indicators, a reading of over 50 percent indicates an expansion.

On the consumption side, retail sales of consumer goods in July missed forecasts, growing 2.5 percent year-on-year to reach RMB 3.67 trillion (US$501.58 billion), 3.1 percentage points lower than June. This is despite the positive impact that the summer holidays would have had on these numbers.

Consumption in certain sectors, such as catering, maintained its momentum in July, whereas others experienced more modest growth:

• Retail sales of grain, oil, and food increased by 5.5 percent year-on-year;
• Retail sales of Chinese traditional medicine and Western medicine grew 3.7 percent year-on-year;
• Retail sales of beverages went up by 3.1 percent year-on-year; and
• Retail sales of telecommunication equipment increased by 3.0 percent year-on-year.

Meanwhile, online retail sales reached RMB 8.30 trillion (approx. US$1.13 trillion), up by 12.5 percent year-on-year. Of this, online retail sales of physical goods totaled RMB 6.98 trillion (approx. US$953.94 billion), accounting for 26.4 percent of total retail sales this year so far. At the same time, between January and July 2023, retail sales of services increased by 20.3 percent year-on-year.

Manufacturing output  growth moderates while high-tech value-add soars

Industrial output in July slowed significantly, lower than the 4.4 percent growth seen in June, and below previous expectations. The value-add of industrial enterprises above a designated size increased by 3.7 percent year-on-year, or 0.01 percentage points higher month-on-month.

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

• The mining industry decreased by 1.3 percent year-on-year;
• The manufacturing industry grew by 3.9 percent year-on-year; and
• The production and supply of electricity, heat, gas, and water increased by 4.1 percent year-on-year.

Some areas still experienced notable expansion. The value added of raw material manufacturing, for example, went up by 8.8 percent year on year, or 2.0 percentage points faster than that of June.

The value-add of foreign-invested enterprises (FIEs) grew by just 1.8 percent year-on-year, while private enterprises grew by 2.5 percent.

Despite the generally low levels of growth, certain market segments experienced growth booms in May. These were mostly high-growth technology industries, with solar cell production and new energy vehicles (NEVs) growing by 65.1 percent and 24.9 percent, respectively, compared to the same period last year.

Steady rise in fixed asset investments, alongside rapid growth in high-tech

Fixed asset investment between January and July reached RMB 25.58 trillion (US$3.49 trillion), an increase of 3.4 percent compared to the same period last year, but a decrease of 0.4 percentage points compared to the January to June period.

By sector, infrastructure investment saw fairly robust growth at 6.8 percent year-on-year, while manufacturing investment grew by 5.7 percent.

Real estate development investment, however, declined further by 8.5 percent. Indeed, the faltering real estate sector is a persistent and substantial drag on the economy.

Despite these challenges, government officials maintain an optimistic outlook, characterizing the current phase of the real estate sector as an “adjustment.” This stance is rooted in the belief that forthcoming policy changes will facilitate a transition out of this period of turbulence, aiming to restore stability and growth to this critical sector.

Secondary industries saw the highest growth in investment at 8.5 percent year-on-year, compared with just 0.9 percent in the primary industries and 1.2 percent in tertiary industries.

High-tech industries continued to attract high levels of investment, growing 11.5 percent year on year. Several high-tech sub-sectors experienced very high levels of growth, including:

• Investment in high-tech manufacturing increased by 5 percent; and
• Investment in high-tech services grew by 11.6 percent.

A similar trajectory is revealed by observing the steady rate of investment in the country’s R&D sector.

Investment by private companies decreased by 0.5 percent year-on-year.

Number of newly established FIEs increased substantially while the actual use of foreign capital decreased

In the first six months of 2023, 24,000 FIEs were newly established in China, a notable year-on-year growth of 35.7 percent, according to data revealed by the Ministry of Commerce (MOFCOM).

Investments from France, the United Kingdom, Japan, and Germany saw particular growth, surging by 173.3 percent, 135.3 percent, 53 percent, and 14.2 percent year-on-year, respectively. Meanwhile, FDI in the high-tech sector witnessed notable growth, ascending by 7.9 percent on a yearly basis.

However, the actual use of foreign capital experienced a 2.7 percent year-on-year decline, reaching RMB 703.65 billion (approx. US$97.55 billion) in H1 2023.

Foreign trade dropped while NEV exports jumped substantially

China’s export sector experienced its most pronounced contraction in July, marking the most significant decline since the beginning of the COVID-19 pandemic and the fastest drop since February 2020. Notably, exports registered a decline of 14.5 percent in July compared to the previous year, amounting to US$281.76 billion. This downturn surpassed industry projections, falling short of expectations of a 4.8 percent decrease.

The decline in exports demonstrated a comprehensive impact, affecting all significant trading partners. Shipments to Southeast Asia, which holds the distinction of being China’s largest trade partner and had significantly bolstered China’s export sector earlier in the year, witnessed a substantial contraction. Specifically, there was a decline of 21.43 percent in July compared to the previous year, representing a second consecutive month of decrease in exports to the ASEAN region.

Exports to the European Union declined by 20.62 percent yearly, and those to the United States dropped for the twelfth consecutive month by 23.12 percent.

Such drop in export aligns with a broader trend of weakening global demand for Chinese goods. A concerning backdrop accompanies these export numbers, with official surveys revealing a fourth consecutive month of contraction in factory activity. The implications of this sustained contraction echo the broader challenges encountered by the manufacturing sector.

However, there are clear outliers to the export slowdown. In July alone, China exported 88,000 units of passenger NEVs, with battery electric vehicles (BEVs) accounting for 92 percent of the total exports. This represented an 80 percent increase year-on-year and a 26 percent from June.

Meanwhile, China’s imports also dropped in July responding to subdued domestic demand, falling 12.4 percent to reach US$206.12 billion year-on-year. The total trade surplus rose to US$80.6 billion, compared to US$70.6 billion registered in June.

Imports and exports by private enterprises grew by 6.9 percent year-on-year, accounting for 52.9 percent of the total value of imports and export

The emergence of deflation concerns adds to the complexity of China’s economic situation. The consumer price index witnessed a decline in July, signaling potential deflationary pressures. However, a contrasting dynamic emerges when looking at the core consumer price index, which excludes volatile food and energy prices.

China’s July economic data: the Chinese government’s response amid economic challenges

Amid the current economic slowdown, the Chinese government has once more pledged its commitment to providing essential policy support to bolster the nation’s economic resilience. The effects of this deceleration have been felt across various sectors, from street vendors to real estate vendors, all grappling with the absence of robust fiscal stimulus measures.

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Shanghai Looks to Attract Foreign Investors with New Measures

Recent developments indicate a proactive stance from Chinese officials, who are actively promoting a range of strategic measures aimed at stimulating private investment and boosting overall consumption. For example, on August 13, 2023, the State Council released the Opinions on Further Optimizing the Environment for Foreign Investment and Increase Efforts to Attract Foreign Investment (hereinafter, “Opinions”), a document detailing 24 policy measures divided among six major areas to boost foreign investment in the country. These include enhancing the quality of real use of foreign investment and ensuring equal treatment of domestic and foreign businesses.

All in all, Chinese authorities intend to utilize well-targeted policy interventions to encourage private investment and spur consumer spending. In doing so, they aim to invigorate economic activity and rejuvenate sectors that have been grappling with the impact of the slowdown.

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