China’s Economic Growth Impacted by Weak External Demand

The Chinese economy has been on track for a strong recovery, fueled by robust domestic demand since the beginning of the year. However, the slowing of external demand is having a negative impact on economic growth, which may cause strain on the labor market.

The recovery of the domestic economy seems to be progressing well. Although retail sales in the first two months of the year grew by 3.5% year-on-year, which was higher than the 2022 figure of -0.2%, it fell short of market expectations. Nonetheless, we believe that this rate of recovery is reasonable. In March, the manufacturing PMI was lower than expected due to weak external demand, but the non-manufacturing PMI increased, indicating a recovery in the real estate sector.

The strong loan growth in January and February indicates that businesses are actively expanding domestically after a period of low activity due to Covid-19. It is expected that loan growth will continue to be strong in March, which implies that business expansion and infrastructure growth should surpass 5% in 2023.

External markets’ weakness could hinder the progress towards recovery. In the first two months of 2023, exports and imports declined by 6.8% and 10.2% year-on-year, respectively, which suggests that external demand is negatively impacting China’s economic growth, as also evidenced by the PMI data. This trend is expected to become more evident in the second half of the year. Consequently, this could affect the manufacturing labor market, and subsequently, consumption.

It is not anticipated that the central bank will further relax its policy. In an effort to mitigate the seasonal interest rate spike, the People’s Bank of China (PBoC) reduced the reserve requirement ratio by 0.25 percentage points at the end of the first quarter and injected a significant amount of liquidity into the financial system. This moderately accommodative monetary policy also acts as a safeguard against the possible spread of global market turbulence to China’s financial markets. However, as the domestic economy is bouncing back, additional easing measures are unlikely. Moreover, aggressive easing could lead to unnecessary inflation in asset prices, which could result in an increase in consumer prices.


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