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China's economic growth and its geopolitical challenges
China economic outlook
China's role in global markets is evolving. Given the size of the domestic Chinese market in almost any sector and the significant role China plays in global trade, the country has become a global economic superpower. However, change frequently results in friction. According to industry analysts, trade disputes, technology restrictions and escalating tensions may raise geopolitical risks associated as China grows in economic power and significance.
According to S&P Global, the real GDP growth forecast for 2023 China has been revised upward to 5.2% from 5.0%, reflecting China's stronger-than-expected economic recovery from the pandemic, and indications of domestic governmental support for growth 2023. The forecast for 2024 has been adjusted to 5.6% from 5.8%.
Projections on Chinese industrial production data have been adjusted as a result of the economy's faster-than-expected recovery and strong policy backing. The government's economic support measures include tax and fee cutting, state-owned enterprise and infrastructure investment expansion, and support measures for housing supply and demand. The government's financial assistance to property developers to facilitate the completion of unfinished constructions will boost construction-related output and remove a significant deterrent to households' decisions to purchase new homes. Due to growing demand, an existing high debt-to-GDP ratio, and the rapid economic recovery, monetary, fiscal and policy support may be gradually withdrawn as the Chinese economy grows.
Despite the ongoing economic recovery, consumer price inflation is unlikely to spike in China. The China economic outlook thus diverges from those expected for the US and Europe, where recovery caused inflation to soar. Supply will likely lead China’s recovery, and monetary policy in China will remain accommodating.
2023 forecast changes of China’s real GDP growth, industrial production and China-US exchange rate
China’s economic outlook forecast - Consumer price inflation, percentage changes year to year
China’s economic growth, percentage changes year to year from 2021-2023
Near-term outlook: China’s economic growth accelerated in the first quarter, primarily in sectors most impacted by pandemic controls
To start 2023 the service sector rebounded more strongly than the manufacturing sector, as service PMI™ increased by nearly 5 points to 52.9 in January, while manufacturing PMI™ remained in the below-50 negative range, based on the Caixin mainland China Purchasing Managers’ Index™ (PMI™) survey by S&P Global Market Intelligence. The ongoing downturn in manufacturing is due to weak external demand, reflected in the PMI™ new export orders indexes.
Since August 2022, the new export orders index has consistently been below 50, coming in at 48.7 in January. Mainland China exports, which grew rapidly during most of the pandemic, have tempered since last summer. Exports of goods grew 14.5% year over year in the first eight months of 2022 and fell 1.6% year over year in August–December 2022. Weak demand in the US and Europe due to high inflation and interest rate hikes were the main obstacles to the strong return of Chinese exports during the pandemic recovery. From January to July 2022, Chinese exports to the US and EU increased 14.9% and 19.6% year over year, respectively, but in the final five months of 2022, Chinese exports to these two markets decreased by 14.7% and 4.7%, respectively. The third-largest export market for mainland China, ASEAN, has remained strong. Chinese exports to ASEAN increased by 19.3% year over year in January-July 2022 and grew 16.6% year over year in August–December.
The potential recovery of the real estate market could counterbalance tepid foreign demand for Chinese goods and services. The government's housing demand and supply support policies are starting to show results. According to the housing price survey conducted by the National Bureau of Statistics in 70 cities around mainland China, the average price of a new home was constant from December to January, ending a 16-month streak of monthly price decreases.
China’s GDP growth, percentage points from 2020-2027, contributed by government consumption vs private consumption
It remains to be seen how much prolonged pandemic controls may have impacted the labor market and consumer confidence. Though household demand for large purchases that require financing is still weak, household saving remains strong. In fact, household deposits grew nearly 17% year over year in January, while growth of long and medium-term loans to households decreased further to 4.1% year over year.
There are some indications that policies in China may focus more on boosting economic growth in 2023. During the Shanghai COVID-19 lockdown, the government encouraged support for the economy through expanded bank lending. In mid-2022, the growth of medium- and long-term loans to nonfinancial enterprises and government units accelerated from around 12% year over year to 16.3% year over year in January 2023.
Despite financial and policy support, investment in the private sector has remained tepid, while investment in infrastructure and state-owned enterprises (SOEs) has increased. Private enterprise investment growth dropped from 7.0% to 0.9%, while SOE fixed-asset investment and China infrastructure investment growth accelerated from 2.9% and 0.4% in 2021 to 10.1% and 9.4% in 2022, respectively.
The Chinese government has officially acknowledged the need for significant policy support to bolster business confidence and affected households. Increasing domestic demand, particularly consumer demand, was identified by President Xi Jinping, as the top economic objective for 2023 in his speech at the Central Economic Work Conference in mid-December 2022. Xi also acknowledged the necessity of expanding state investment to spur investment recovery, contributing to China’s economic growth.
Regional administrations disclosed their 2023 targets for their regional economies in the run-up to the National People's Congress in March. At the Congress itself, the central government released a variety of China’s economic goals for the year 2023. Ten regions set their 2023 fixed asset investment (FAI) growth objective lower than their region's actual FAI growth rate in 2022, out of the 25 provincial-level regional governments that have published their 2023 economic plans. The regional governments' cautious FAI targets reflect limited financial resources, the property-sector downturn and weakened sentiment in regional business communities.
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Chinese demand revival steers the global energy market
Revitalized economic growth in China will be a major boon to product demand in the year ahead. S&P Global has boosted its forecast for refined product demand in China by 720,000 b/d for the first quarter of 2023, predicting a significant increase in the demand for refined products of just over 700,000 b/d for the full year. Although jet and diesel demand are expected to improve, gasoline accounts for more than half of this increase. Domestic demand growth can impact export volumes and quota choices for later in the year, which might make product markets tighter.
The reshuffling of the diesel trade has started due to the implementation of the EU refined product embargo. Russian exports to major Western European markets have drastically decreased, totaling only about 165,000 b/d in January compared with exports of nearly 300,000 b/d in December, according to recent S&P Global Commodities at Sea data.
Russian loadings destined for Asia have also increased. Oil industry analysts estimate that Russia will be able to export more oil to Turkey, the Middle East and Asia in 2023 than anticipated. As a result, more Middle Eastern oil will be available for European markets. As a result of these increased Russian exports, Russian refinery run cuts necessitated by the EU embargo are now expected to be limited to approximately 600,000 b/d in 2023. Another possibility is that mainland China will import more diesel while exporting more domestically produced diesel in its place. These volumes are limited, and our forecast does not assume a substantial increase in Chinese imports, but this remains a risk that could turn the EU product embargo into a low-impact event.
End of restrictions and Lunar New Year are supporting higher people movements in mainland China, boosts China’s economic growth.
A world rebalancing – Five themes driving the economics and risk outlook in 2023
US-China relations
Trade disputes and tariffs imposed in recent years appear to have affected diplomatic relations between the US and China. Trade restrictions could harm global economic growth. Economists believe that both tariff-imposing countries and countries subject to tariffs suffer losses in economic welfare, while non-tariff countries sustain collateral damage. China and the US officials have both expressed a desire to alleviate trade tensions. Key issues for negotiation include market access, intellectual property rights and joint venture technology transfer.
During China’s 20th Party Congress, President Xi Jinping appeared to suggest that he is prioritizing China’s economic security over economic growth. One way to achieve economic security is to reduce reliance on external trade relationships and reduce vulnerability to external pressures.
While the current Biden administration has expressed a desire for trade talks, the US has also announced additional limitations on the export to China of advanced semiconductor technologies. Semiconductors are seen as a key area of strategic competition between the two countries.
Another area of strategic competition between China and US is in materials and components necessary to meet ambitious targets for the deployment of solar, batteries and electric vehicles. China controls much of the world’s mining and production of elements related to the energy transition. The US, EU and other G7-aligned countries are dependent on Chinese exports of these materials. Limitations in supplies of these materials are likely to affect the progress of building out lower-carbon energy and automotive sectors.
Prospects and impact of De-Dollarization
U.S. led sanctions following the Russian invasion of Ukraine have strengthened concerns in some countries around the US dollar as the global reserve currency. Many economists, including those at S&P Global Market Intelligence believe the renminbi is unlikely to replace the US dollar in the global financial system soon.
Renminbi internationalization is one of multiple requirements for the renminbi to achieve major reserve currency status. Other prerequisites for the home country of a major reserve currency include:
- Free-floating exchange rate. The home country’s currency is traded freely with a market-determined exchange rate.
- Fully convertible currency. The home country’s currency has full convertibility (open capital account) – that is, capital can flow freely into and out of the home country without any official restrictions.
- Economy size. The home country of a major reserve currency should have a large economy with sizeable shares in international trade and finance.
- Stable macroeconomic policies. The home country has a long history of stable and credible macroeconomic policies that maintain low inflation and public debt sustainability.
- Developed financial market. The home country possesses well-developed and deep financial markets that provide ample safe financial assets to be held by foreign investors. A well-developed and robust financial market is also necessary for the home country’s currency to be fully convertible.
Global forex trading composition and global foreign currency exchange composition Q4.
China’s economic growth has been a sustained success story. From a predominantly agrarian economy to one of the major manufacturing and consumer marketplaces in the world, the nation has seen a tremendous shift. However, the transition from a US-led global economy to an emerging, potentially multipolar reality has resulted in tensions that threaten to undermine the positive affect of global trade. Companies operating in this shifting geopolitical context must take account of risks that impact supply chains, currencies, and global economic growth.
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