China Economic Roundup – May 2023

China’s May economic data shows the country remains on the trajectory of steady post-COVID recovery, but uneven growth points to challenges ahead.

China’s National Bureau of Statistics (NBS) has released the key economic indicators for May 2023, showing a slowdown in the post-COVID economic recovery compared to data from April.

Key indicators across manufacturing, services, consumption, investment, and international trade recorded slowed growth but remained positive overall. In a press conference for the release of the May statistics, the Spokesperson for the NBS Fu Linghui stated that “production demand has gradually recovered, employment and consumer prices have generally stabilized, economic operations have stayed on a trajectory toward recovery, and the quality of development has continued to improve”. 

However, he also acknowledged that “the international environment is still complex and severe, global economic growth is sluggish” and that while “the domestic economy is recovering well, market demand is still insufficient”.

The dip in growth has led the government to consider a stimulus package to boost growth in the latter half of the year.

Overview of key economic indicators

China experienced a deceleration in growth across almost all major economic indicators in May. However, overall growth remained strong, with services and consumption continuing to record double-digit growth. Manufacturing output growth, which has remained relatively low in 2023, also slowed slightly from April, while growth in fixed asset investment slowed for the third consecutive month. 

Service sector and consumption growth slows

On the supply side, the index of services production (ISP) grew 11.7 percent year-on-year in May, a slowdown of 1.8 percentage points from April. 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 May 2023 was up 9.1 percent year-on-year, 0.7 percentage points faster than that from January to April 2023.

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

• Hospitality and catering, which grew 39.5 percent year-on-year;
• Leasing and business services, up 14 percent year-on-year;
• Wholesale and retail, up 13.2 percent year-on-year; and
• Information transmission, software, and IT, up 12.9 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 (approx. US$2.8 million)) grew 6.9 percent year-on-year.

Service business activity indices also recorded an expansion, with the Business Activity Index for Services at 53.8 percent, and the Business Activity Expectation Index for Services at 60.1 percent. A reading of over 50 percent indicates an expansion.

Of these, the business activity indices of industries, such as railway, water, and air transport, telecommunications, broadcasting, television, and satellite transmission services, and software and IT services, were all above 60 percent, indicating a high level of growth.

On the consumption side, retail sales of consumer goods in May missed forecasts, growing 12.7 percent year-on-year to reach RMB 3.8 trillion (US$530.7 billion), 5.7 percentage points lower than April. This is despite the positive impact the Labor Day Holiday at the beginning of May would have had on these numbers.

Consumption in certain sectors, such as catering, saw a significant jump in May, whereas others experienced more modest growth:

• Retail sales of goods reached RMB 3.4 trillion (approx. US$475 billion), up 10.5 percent year-on-year;
• Catering revenue reached RMB 407 billion (approx. US$56.9 billion), up 35.1 percent;
• Retail sales of communication equipment above a designated size (annual main business income of over RMB 20 million) grew 27.4 percent year-on-year;
• Retail sales of gold, silver, and jewelry grew 24.4 percent year-on-year; and
• Retail sales of sports and entertainment products increased by 14.3 percent year-on-year.

Meanwhile, online retail sales reached RMB 5.7 trillion (approx. US$795.2 billion) between January and May 2023, a year-on-year increase of 13.8 percent, accelerating by 1.5 percentage points from the period from January to April 2023. Of this, online sales of physical goods amounted to RMB 4.8 trillion, accounting for 25.6 percent of total retail sales this year so far.

Manufacturing output slows but high-tech value-add soars

Industrial output in May slowed significantly in May, with some sectors even experiencing a contraction. The value-add of industrial enterprises above a designated size (those with a main annual business income of above RMB 20 million) increased by 3.5 percent year-on-year, 2.1 percentage points lower than in April. Month-on-month, the value-add grew by 0.63 percent. 

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

• The mining industry decreased by 1.2 percent year-on-year;
• The manufacturing industry grew by 4.1 percent year-on-year;
• The production and supply of electricity, heat, gas, and water increased by 4.8 percent year-on-year; and
• The equipment manufacturing increased by 8 percent year-on-year, outperforming the overall industrial growth by 4.5 percentage points.

The value-add of foreign-invested enterprises grew by 4.2 percent year-on-year, while private enterprises grew by 0.7 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, new energy vehicles, and service robots increasing by 53.1 percent, 43.6 percent, and 34.3 percent respectively compared to the same period last year.

Strong investment in high-tech segments

Fixed asset investment between January and May reached RMB 18.9 trillion (US$2.6 trillion), an increase of 4 percent compared to the same period last year, but a decrease of 0.7 percentage points compared to the January to April period. 

By sector, infrastructure investment saw fairly robust growth at 7.5 percent year-on-year, while manufacturing investment grew by 6 percent. Real estate development investment, however, declined by 7.2 percent. 

Secondary industries saw the highest growth in investment at 8 percent year-on-year, compared with just 0.1 percent in the primary industries and 2 percent in tertiary industries. 

High-tech industries continued to attract high levels of investment, growing 12.8 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 18.8 percent;
• Investment in electronic and communication equipment manufacturing increased by 16.1 percent year-on-year;
• Investment in technology transfer services increased by 47.4 percent year-on-year; and
• Investment in professional technical services increased by 40.6 percent year-on-year.

Investment by private companies decreased by 0.1 percent year-on-year.

Foreign investment growth plateaus

China absorbed RMB 574.8 billion (approx. US$80.3 billion) in the actual use of foreign capital between January and May 2023, according to data from the Ministry of Commerce (MOFCOM). This is a year-on-year increase of 0.1 percent. In dollar terms, the actual use of foreign capital decreased by 5.6 percent to reach US$84.35 billion over this period.

Despite the slow overall growth in FDI, 18,532 foreign invested enterprises (FIEs) were established across China between January and May, up 38.3 from the same period last year.

FDI growth was highest in manufacturing and high-tech industries:

• The overall manufacturing industry increased by 5.9 percent year-on-year, reaching RMB 147 billion (approx. US$20.5 billion); and
• High-tech industries increased by 7 percent year-on-year, of which:
  • High-tech manufacturing increased by 30.8 percent year-on-year; and
  • High-tech services grew by 1.5 percent year-on-year. 

Investment from France, the United Kingdom, Canada, and Japan saw particularly high increases, up 429.7 percent, 179.2 percent, 170.1 percent, and 63.3 percent year-on-year, respectively.

Foreign trade volume remains sluggish, but trade value is up

International trade also saw sluggish growth in May, with overall imports and exports increasing just 0.5 percent from the previous year. The total value of goods imports and exports reached RMB 3.4 trillion (approx. US$481.6 billion). Of this, exports amounted to RMB 1.9 trillion, down 0.8 percent year-on-year, while imports reached RMB 1.5 trillion, an increase of 2.3 percent year-on-year. The trade surplus was RMB 452.3 billion (approx. US$63.2 billion). 

However, imports and exports by private enterprises grew by 13.1 percent year-on-year, accounting for 52.8 percent of the total value of imports and export

Although overall trade volume was low, the total value of imported and exported goods grew at a faster rate, reaching RMB 16.8 trillion (approx. US$2.34 trillion), an increase of 4.7 percent year-on-year. The value of exports grew even faster, up 8.1 percent year-on-year to reach RMB 9.6 trillion (approx. US$1.34 trillion) while imports reached RMB 7.15 trillion (approx. US$998.7 billion), an increase of 0.5 percent year-on-year. 

Why did growth slow in May?

An important factor to consider when looking at the May figures is the low base effect as a result of low or negative growth rates recorded in the same period in 2022. Consumption and services industries were particularly impacted by pandemic-related restrictions, which were especially severe in April and May last year. However, whereas consumption almost completely ground to a halt across multiple cities that were under complete lockdown in April 2022, by May 2022 consumption had started to recover somewhat. This may partly explain the large uptick in growth in these segments in April 2023, and the slight dip in May.

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The manufacturing industries, on the other hand, although they also felt the impact of the pandemic, were not as badly affected, and so the figures from 2022 are considerably better. For this reason, the 2023 figures provide a somewhat more realistic growth figure than for services.

There are also a range of current factors impacting growth, including slowing domestic demand, continued turmoil in the property market, and a weakening global economy.

Exports, a key contributor to China’s economic growth, have been severely impacted by high inflation and an economic recession in key overseas markets, such as the EU and North America. As overseas consumers tighten their belts, they are spending less on Chinese goods. Import volume, meanwhile, has remained consistently low due to weak domestic demand.

The slowdown in FDI growth may also be attributable in part to the base effect. According to the Foreign Investment Department of MOFCOM, large foreign-invested projects received large volumes of funds from January to May last year, while the FDI reached a historical high in US dollar terms during this period in 2022, resulting in a high base effect.

However, other factors may also be weakening business confidence overall. Foreign companies in China are also impacted by the weak global economy, while shaky relations with the US and the EU are causing uncertainty among investors.

The housing market, which has been struggling with the risks of defaults since 2021, has led to consistently low property sales, which continues to place pressure on the overall growth of the economy.

Policies for stimulating growth

On the back of the slowing economic recovery witnessed in the second quarter, the Chinese government is widely expected to release a series of policy measures to stimulate growth. The government has generally been hesitant to roll out sweeping stimulus measures in the past due to concerns it will create a speculative environment, but with the prospect of missing the “around 5 percent” GDP growth target set for 2023 and historically high youth unemployment rates, it is now considering more impactful measures.

Related Reading

Shanghai Looks to Attract Foreign Investors with New Measures

In a recurring State Council meeting on June 16, presided over by Premier Li Qiang, the State Council addressed issues impeding economic recovery, including an increasingly complex external environment and slowing global trade and investment. 

In response to these obstacles, the State Council called for “more forceful measures […] to enhance the momentum of development, optimize the economic structure, and promote the continuous recovery of the economy.” The readout of the meeting stated that the State Council has researched a series of policy measures covering the following areas, 

• Increasing the intensity of macro-policy regulation;
• Focusing on expanding effective demand;
• Strengthening and optimizing the real economy; and
• Preventing and defusing risks in key areas.

The meeting called for support policies to be introduced “as soon as possible”. According to sources cited by the Wall Street Journal, the stimulus package may also include issuing RMB 1 trillion (approx. US$139.8 billion) worth of special purpose bonds (SPBs), a tool for boosting infrastructure investment.

On June 15, in order to inject more liquidity into the markets, China’s central bank cut the borrowing rate on the medium-term lending facility (MLF) on RMB 237 billion (approx. US$33.1 billion) worth of loans by 10 basis points, from 2.75 percent to 2.65 percent. The week prior, several of China’s state-owned commercial banks also lowered interest rates on RMB deposits, which could help to reduce lending costs.

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