China’s economic slow down during 2022-2023

impact on household’s consumption

Abstract
This paper explores the economic slowdown in China during the years 2022-2023 and its impact on
household’s consumption. The analysis is based on various economic indicators, expert opinions, and
data from different sources.

Introduction
China, the world’s second-largest economy, has been experiencing a significant slowdown in its
economic growth during the years 2022-2023. This slowdown has been attributed to a myriad of
factors, including structural issues such as debt and demography, and external factors such as
COVID-19, China’s deteriorating relationship with the West. This paper aims to delve into the impact
of this economic slowdown on a crucial aspect of the Chinese economy - household’s consumption.
By examining various economic indicators, expert opinions, and data from different sources, we seek
to understand how the economic downturn has affected consumer behavior and spending patterns in
China. The findings of this study could provide valuable insights for policymakers, economists, and
businesses alike.

Methodology
The methodology involves quantitative method with a comprehensive review of available literature,
data analysis, and interpretation of various economic indicators. It also includes an examination of
government policies and investor expectations in response to the economic slowdown.

Literature Review
https://assets.kpmg.com/content/dam/kpmg/cn/pdf/en/2023/08/china-economic-monitor-q3-2023.pdf
https://mof.gov.vn/webcenter/portal/ttpltc/pages_r/l/chi-tiet-tin-ttpltc?dDocName=MOFUCM149038
https://vneconomy.vn/kinh-te-trung-quoc-duoi-suc-trong-thay-ap-luc-kich-cau-ngay-cang-lon.htm

CEU-June-2023-EN.pdf (worldbank.org)

Experts React: China’s Economic Slowdown: Causes and Implications (csis.org)

Discussion
Why is China’s economic slowing down during 2022-2023?
The weaknesses of China’s economy fundamentally stem from decisions made many years ago, even
in some cases from several decades ago. In the past, China reaped the benefits of a young labor force,
which was considered a factor in stimulating GDP growth through the addition of labor. This is also
because young workers tend to achieve higher productivity than the older generation.
However, since mid-2012, the working-age population began to decline, an inevitable consequence of
the one-child policy implemented from 1997. The GDP growth rate has partially decreased due to this
demographic shift.
During 2023, the increasing rate of unemployment among the youth is causing worry. The
unemployment rate for individuals aged 16-24 reached a record high of 21.3% in June - 2023, an
increase from 20.8% in May - 2023.
This issue further emphasizes the pressure on the role of the Chinese government in creating more
new jobs.

COVID-19 Omicron Outbreak

The strong outbreak of the Omicron variant of Covid-19 led to mobility restrictions, particularly in
Shanghai in March 2022, which significantly reduced China’s growth rate to 3%, compared to the
World Bank’s forecast of 4.3% for 2022.
“In the short term, China faces the dual challenge of balancing COVID-19 mitigation with supporting
economic growth,” said Martin Raiser, World Bank Country Director for China, Mongolia and Korea
(World Bank, 2022).

GDP growth

The data released by the National Bureau of Statistics of China (NBS) on the morning of July 17
shows that the GDP of the world’s second-largest economy grew by 0.8% in the second quarter
compared to the first quarter. This increase is higher than the 0.5% forecast by economists in a
Reuters survey, but it is a sharp decrease from the 2.2% growth recorded in the first quarter.
Compared to the same period last year, China’s second-quarter GDP increased by 6.3%, higher than
the 4.5% increase in the first quarter, but much lower than the 7.3% increase forecast by Reuters.

Sharp decline in exports

Exports have always been an important growth driver in 2022, but in 2023, exports could significantly
decrease to the lowest level in three years since the start of the coronavirus outbreak in February 2020
due to a sharp decline in both domestic and international demand, labor shortages, and disrupted
logistics systems.
Property sector and infrastructure
The property sector and infrastructure have been significant drivers of China’s GDP growth, but their
contributions are changing. In the past, the property sector played a crucial role in China’s growth.
However, it has become a risk due to excessive construction and vacant housing. About 20% of
China’s housing stock is currently vacant, even though developers continue to build millions of new
units each year. Troubles in the property sector have emerged recently, with companies like
Evergrande facing debt repayment challenges and the threat of default. Authorities are implementing
measures to curb speculation and limit borrowing among developers. Lower home prices could
benefit consumers and contribute to a healthier overall economy. The contribution of real estate and
related industries to China’s GDP is predicted to fall from roughly 30% to around 15%.
Infrastructure spending in China has been substantial, nearly 10 times higher than that of the United
States. The construction industry, including infrastructure projects, accounted for around 6.9% of
China’s GDP in 2022. The Chinese government aims for a gradual slowdown in the real estate sector
to avoid an economic hard landing. Using the real estate sector to boost GDP growth is not
sustainable in the long term. “We have too big of a risk in the sector. We built too much housing, so
the stabilization first has to come [from] trimming the sector,” Li Gan, an economics professor at
Texas A&M University.
It can be seen that due to policy support, infrastructure still remain resilient while weakened prospects
in private sector slowed down its growth. The growth in fixed asset investment dropped from 5,1% in
Q1 – 2023 to 2,8% in Q2 – 2023.

Going rivalry with the US

How does China’s economic slowing down during 2022-2023 affect

household’s consumption?
Reopening in 2023 led to a rebound, but the recovery remains soft
In 2022, households faced significant limitations due to enforced lockdowns and travel restrictions.
After COVID-related regulations lifted, retail sales saw a strong rebound in service sector. The
upswing in the first quarter was driven by the unleashing of accumulated consumer demand, a slight
uptick in the housing sector, and policy interventions. However, the pace of growth has decelerated
since April, suggesting that China’s economic rebound is still reliant on policy assistance.

However, the recovery in consumption is still incomplete, after a robust recovery in the first quarter,
the momentum of retail sales growth slowed down in April due to the continuous underperformance
of durable goods sales such as furniture and home appliances. This can be partially attributed to the
sluggish growth of household income. In Q1 2023, the real disposable income per capita increased by
3.8 percent year on year, which is lower than the growth rate of the overall economy. At the same
time, China’s economic recovery has not been able to mitigate youth unemployment. The
unemployment rate for individuals aged 16-24 surged to 20.4 percent in April, surpassing the 19.9
percent rate observed in July 2022, even though the overall unemployment rate remained stable at 5.2
percent in April.
As the recovery in employment and household income is still not complete, households have been
careful with their spending and have chosen to save instead. The seasonally adjusted household
savings rate has seen a slight decrease since its peak in Q4 2022, but it was still 3 percentage points
higher in Q1 2023 compared to the level before the pandemic.

In June, China’s Consumer Price Index (CPI) dropped from 0.2% in May to 0%, largely due to the
prices of pork and energy. However, the Core CPI, which excludes food and energy, also fell by 0.2
percentage points to 0.4%, suggesting a sluggish demand.
How is China’s government trying to overcome this circumstance?
Experts believe that China’s government is confronted with a difficult mission: They must strike a
balance between ensuring economic recovery progresses correctly and lowering unemployment rates,
while also managing the potential risk of a significant rise in debt and economic distortion if they opt
for a substantial stimulus package.
China is indeed facing a significant financial challenge. In 2022, China’s total debt, which includes
corporate, household, and government debt, reached nearly 300% of its Gross Domestic Product
(GDP) according to estimates by the Bank for International Settlements (BIS). This high level of debt
poses a risk to the country’s financial stability and could have implications for its economic growth
and development.
The demand in the housing market is weak due to the home ownership rate reaching 80% in 2020,
coupled with a declining population and stagnating household income growth. This has led to a
surplus of housing and a decrease in demand, which can have significant implications for the real
estate market and the broader economy.
A massive stimulus package cannot address the root causes of structural issues. Whether ready or not,
China is transitioning away from an economy driven by real estate growth and local governments.
This is a process fraught with difficulties.
To stimulate economic activity, the People’s Bank of China (PBOC) has recently been consistently
lowering interest rates, while government officials are discussing plans to boost infrastructure
spending and relax restrictions on the real estate market. This is part of their strategy to manage the
economic slowdown and stimulate growth.
In a recent development, the People’s Bank of China (PBOC) executed its third reduction in interest
rates within a span of just over a week on August 20th. As a result, the fundamental one-year term
interest rate was lowered by 0.1 percentage point, moving from 3.65% to 3.55%. Similarly, the
fundamental five-year term interest rate was also reduced by 0.1 percentage point, shifting from 4.3%
to 4.2%. This action is part of their broader strategy to manage the economic deceleration and
stimulate growth.

Experts suggest that China’s policy makers are likely to implement only modest measures instead of a
substantial stimulus package, given the limited budgetary space and escalating debt concerns.
However, if the economic downturn persists, job losses could increase and the risk of deflation could
rise, further undermining the confidence of the private sector.
.

What can Investors expect from China’s government actions?

Result
Conclusion