China’s Economy in 2023 – A Year of Growth and Recovery

China’s economy in 2023 is set to beat growth targets based on the sustained positive figures recorded in the last three quarters of the year. In addition to strong GDP growth, indicators for consumption, services, and industrial output show key segments of the economy have rebounded following the lifting of COVID-19 restrictions. At the same time, areas such as foreign trade and private investment have lagged, casting light on unbalanced recovery. We review China’s economic performance in 2023 and discuss the trends that have emerged in the post-COVID era.

On January 8, 2023, China officially downgraded COVID-19 to a “Category B infectious disease”. With this act, the government lifted a wide range of restrictions and regulations aimed at containing the spread of the virus, such as restrictions on internal and international travel and mandatory quarantine for inbound travelers and people infected with the virus.

Many sectors of the economy that had stagnated under strict COVID-19 rules were now able to flourish once again, while the rebound in movement and travel unleashed pent-up consumption.

Later decisions to resume the issuance of all types of visas also made international business travel possible again for the first time in three years, a huge boon to foreign companies and investors.

The uptick in economic activity in 2023 is reflected in the positive economic data recorded over the first 11 months of the year, from service activity to consumption to factory output.

However, while China’s economy has experienced health recovery since the pandemic, several areas of weakness remain. Recovery has not been entirely smooth and balanced, with some sectors performing better than others.

In this article, we look at how China’s recovery has developed throughout 2023, examining the trends that have emerged, as well as the government’s ongoing efforts to address lingering issues and foster sustainable growth in the post-COVID era.

China’s GDP growth in 2023

Although the government had already begun to loosen the pandemic containment system in late 2022, lingering uncertainty surrounding the possible reintroduction of restrictions and anxiety over the spread of the virus prevented an immediate rebound. Hard-hit industries, such as catering and retail, struggled to recover amid low rates of consumption, while industrial and manufacturing output remained stubbornly low.

With the official designation of COVID-19 as a lower-risk disease, China set its economy back on track to recovery in 2023. Growth in the first quarter reached 4.5 percent, beating forecasts by the likes of Chinese data provider Wind as well as Reuters, but missing the full-year target of “around 5 percent” growth set during the 2023 Two Sessions.

While the economy was beginning to recover in the first quarter, travel and consumption remained below pre-pandemic levels, with many people still choosing to stay at home during the 2023 Chinese New Year holiday, a peak shopping and travel season.

At the same time, factory output was impeded by labor shortages due to the spread of COVID-19 between workers.

Growth picked up considerably in the second quarter, with the half-year GDP growth reaching 5.5 percent from the same period in 2022. GDP in the second quarter alone reached 6.3 percent year-on-year, the fastest quarterly growth rate recorded since the second quarter of 2021.

Consumption also saw healthy growth during this period, with total retail sales of consumer goods reaching RMB 22.76 trillion (approx. US$3.17 trillion), up 8.2 percent compared to the same period in 2022 and 2.4 percentage points faster than the first quarter. Consumption numbers were buoyed in part by the return of domestic and international travel, as evidenced by the strong performance of the travel industry during the week-long May Day Holiday.

While growth has been somewhat uneven in 2023, GDP nonetheless grew at a strong average of 5.2 percent year-over-year in the first three quarters of 2023, reaching a total of RMB 91.3 trillion (US$12.89 trillion).

It is important to note that GDP growth rates in 2023 will be affected by a low base effect as a result of slow growth in 2022 – in particular in the second quarter when growth slowed to just 0.4 percent year-on-year. Nonetheless, the uptick indicates a significant improvement in economic activity from 2022, with indisputable rebounds in areas such as services and consumption.

Industry and manufacturing

China’s industrial and manufacturing value-added output has remained relatively stable throughout 2023, although some sectors have performed better than others.

Overall industrial added value and manufacturing value have hovered around mid-single digits but have picked up considerably in the last few months of the year. In November 2023, the added value of industries above the designated size (those with a main business income of over RMB 20 million) increased by 6.6 percent year-on-year. In the period from January to November, this growth rate averaged 4.3 percent year-on-year.

Automotive manufacturing has recovered extremely well, experiencing double-digit growth for the majority of the year and peaking at 44.6 percent year-on-year growth in April (affected by the low base effect from 2022). The industry is also expected to record sales and exports in 2023. The sector produced 2.95 million cars in November, an increase of 23.6 percent year-on-year. This included 1 million new energy vehicles (NEVs), up 35.6 percent year-on-year.

The added value of the electronics manufacturing industry, on the other hand, remained relatively low in the first seven months of the year, perhaps due to weak overseas demand leading to low exports. Output has picked up since August, however, and the sector exceeded 10 percent year-on-year growth in November – a number reflected by the uptick in exports that same month.

Added value output in 2023 has been tilted in favor of state-owned enterprises (SOE), illuminating the unequal recovery of the private and public sectors in the post-COVID era. In November, the added value of SOEs increased by 7.3 percent year-on-year, higher than for private enterprises (up 5.2 percent year-on-year) and foreign, Hong Kong, Macao, and Taiwan-invested enterprises (4.4 percent year-on-year).

The latest private sector added value output figures have nonetheless improved from earlier in the year; according to H1 2023 data, the added value of private companies grew just 1.9 percent year-on-year, while added value by SOEs grew by 4.4 percent year-on-year in this period.

Services and consumption rebound

The services sector was hit particularly hard by COVID-19 restrictions. As consumption plummeted due to lockdowns and other restrictions on movement, retail sales of consumer goods in 2022 fell by 0.2 percent year-on-year. Furthermore, the added value of industries such as transport and hospitality fell by 0.8 percent and 2.3 percent year-on-year respectively (although service industries not reliant on in-person interactions, such as finance and IT, performed much better).

The sector’s rebound in 2023 is therefore indicative of the overall recovery of China’s economy. In the first three quarters of 2023, the added value of the service industry grew by 6 percent year-on-year, accelerating from 2.3 percent year-on-year growth the previous year.

Industries that suffered under COVID restrictions performed particularly well in the first three quarters, with catering and hospitality up 14.4 percent year-on-year and transport, warehousing, and postal services up 7.5 percent year-on-year.

Production indices in the months since show how service sectors are maintaining strong growth. From January to November 2023, the national service industry production index increased by 8 percent year-on-year, 0.1 percentage points faster than that from the period from January to October.

Production in several service sectors also experienced double-digit growth in November:

• The hospitality and catering industry increased by 30.6 percent year-on-year, up 9.3 percentage points from October;
• The transportation, warehousing, and postal industry grew by 15.1 percent year-on-year, up 1.9 percentage points from October;
• The information transmission, software, and IT service industry grew by 13.3 percent year-on-year, up 2.4 percentage points from October; and
• The wholesale and retail industry increased by 11.9 percent year-on-year, up 1.9 percentage points from October.

The rebound in services was driven by a marked uptick in consumption, particularly from the second quarter onward. From January to November, total retail sales of consumer goods reached RMB 42.8 trillion (US$US$6.04 trillion), a year-on-year of 7.2 percent. Excluding automobiles, total sales reached RMB 38.5 trillion (US$5.44 trillion), up 7.3 percent year-on-year.

November alone saw merchandise sales grow 8 percent year-on-year to reach RMB 3.69 trillion (US$521.15 billion). In addition, revenue from catering services reached RMB 558 billion (US$78.8 billion) up 25.8 percent from November 2022, although low base effect from the previous year means that the growth figures skew high.

Online shopping also saw a considerable uptick in 2023, even as lockdowns in 2022 drove more online sales. From January to November 2023, online retail sales grew 11 percent year-on-year, reaching a total of 13.96 trillion. Of this, online retail sales of physical goods were up 8.3 percent from the same period in 2022, reaching RMB 11.77 trillion (US$1.66 trillion), accounting for 27.5 percent of the total retail sales of consumer goods. Online retail sales of physical goods, food, clothing, and household goods increased by 12 percent, 9.2 percent, and 7.5 percent respectively.

Foreign trade

Foreign trade has been one of the sore spots in China’s economy in 2023. Although the year got off to a strong start, with total trade volume growing 4.8 percent year-on-year in the first quarter, by November, it had slowed to be equal to that of 2022.

High inflation and a cost-of-living crisis in key overseas markets – above all, the US and Europe – have reduced demand for imported Chinese goods in 2023, while domestic demand for imported goods has remained somewhat lackluster.

However, the last few months indicate that foreign trade has begun to recover. In October, overall trade reversed course for the first time in four months and grew by 0.9 percent year-on-year thanks to strong imports. Exports followed suit in November, growing 1.7 percent year-on-year following six months of contraction.

According to data from China Customs, trade with several of China’s largest trading partners fell in the first 11 months of 2023. Total bilateral trade with ASEAN countries, which together form China’s largest market for exports and imports, reached US$825.6 billion, a decline of 5.3 percent year-on-year. Contractions were also recorded in bilateral trade with the EU (down 7.6 percent year-on-year) and the US (down 12.2 percent year-on-year).

Exports generally saw a steeper decline than imports, with exports to ASEAN, the EU, and the US falling by 5.5 percent, 11 percent, and 13.8 percent year-on-year, respectively.

There are some notable exceptions, however. Trade with Russia reached a total of US$218.2 billion, up by a remarkable 26.7 percent year-on-year, as Western sanctions drove the country closer to China. In addition, imports from Australia grew 8.3 percent year-on-year thanks to breakthroughs in longstanding trade disputes on the imports of Australian goods such as barley and wine.

Investment

Between January and November 2023, fixed asset investment (FAI) increased by 2.9 percent year-on-year to reach RMB 46 trillion (US$US$6.5 trillion). FAI in both infrastructure and manufacturing was strong, growing 5.8 percent and 6.3 percent year-on-year respectively.

Several industries also drew in high levels of investment in 2023, most notably high-tech manufacturing (up 10.5 percent year-on-year from January to November) and high-tech services (up 10.6 percent year-on-year).

Private FAI has remained very low in 2023, in particular among small and medium-sized enterprises, which have struggled to fully recover following the COVID-19 pandemic. While private FAI increased slightly by 0.4 percent year-on-year in the first four months, it has been in a state of contraction ever since.

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Between January and November, private FAI decreased by 0.5 percent year-on-year. Of this, the FAI of domestic private companies increased by 3.2 percent year-on-year, the FAI of Hong Kong, Macao, and Taiwan companies decreased by 2.1 percent year-on-year, and the FAI of foreign companies decreased by 0.3 percent.

If we exclude real-estate investment, however, private FAI increased by 9.1 percent year-on-year, which may reflect how the turmoil in the property sector is disproportionately impacting private businesses more than state-owned businesses (overall real-estate investment fell by 9.4 percent year-on-year between January and November).

The low private FAI figures are in stark contrast to investment by SOEs. In the first 11 months of the year, the FAI of SOEs grew by 6.5 percent year-on-year. The gap between private and foreign sector investment is further evidence of an unbalanced recovery, with private enterprises bouncing back at a much slower rate.

Moreover, although overall private investment has been low, data shows that certain industries continued to be attractive to private companies. In the first 10 months of the year, private FAI in the secondary industries rose 9.4 percent year-on-year. Several sectors also saw double-digit private investment growth:

• Private FAI in automobile manufacturing rose 19.3 percent year-on-year;
• Private FAI in electrical machinery and equipment manufacturing rose 33.6 percent year-on-year; and
• Private FAI in the construction industry rose 29.6 percent year-on-year.

According to analysis from the Economist Intelligence Unit (EIU), the uptick of private FAI in electrical machinery and equipment manufacturing is partly attributable to the increasing intra-Asian trade bolstered by the recent trend in supply chain diversification to countries in South and Southeast Asia. Although companies may be starting to reshore production to China’s neighbors, they remain reliant upon China to supply capital goods and intermediate goods. This in turn fuels the private FAI in the equipment manufacturing sector.

Foreign direct investment

Foreign direct investment (FDI) has also fallen in 2023. According to the latest data from China’s Ministry of Commerce (MOFCOM), the actual use of foreign capital declined by 9.4 percent year-on-year between January and October, totaling RMB 987 billion (US$139.4 billion). However, the number of newly registered foreign companies grew by 32.1 percent year-on-year, with a total of 41,947 new foreign-invested companies registered.

Moreover, foreign investment still grew in certain industries. Manufacturing, for instance, utilized RMB 283.4 billion (US$40 billion) in foreign capital over this period, an increase of 1.9 percent year-on-year. Of this, utilized foreign capital in high-tech manufacturing increased by 9.5 percent year-on-year.

Other industries also continued to attract high levels of foreign investment:

• Utilized foreign capital in the medical equipment and instrument manufacturing industry grew by 34.6 percent year-on-year;
• Utilized foreign capital in electronics and communication equipment manufacturing grew by 14.8 percent year-on-year; and
• Utilized foreign capital in the R&D and design services industry grew by 15.9 percent year-on-year.

Foreign investment in the overall service industry declined, however, with utilized foreign capital decreasing by 15.9 percent year-on-year.

Business and investment support measures in 2023

As achieving the “around 5 percent” annual GDP growth target began to appear uncertain earlier in the year, the government began to mull the possibility of stimulus measures to get the economy over the line.

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In June, during a recurring State Council meeting, the government suggested that “more forceful measures […] to enhance the momentum of development, optimize the economic structure, and promote the continuous recovery of the economy” were needed. The meeting readout also said that the State Council has researched a series of policy measures, including 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.

While this announcement suggested that a broader stimulus package may have been in the works, China did not roll out direct stimulus measures as it had done in 2020. Instead, the government has introduced several support and incentive measures targeting specific areas of the economy that have fallen behind, such as the private sector, small businesses, and foreign companies.

These measures seek to improve conditions for companies by tackling some of the major pain points and improving the overall business and investment environment, rather than providing direct stimulus.

Measures to boost private investment

In July, the National Development and Reform Commission (NDRC), China’s macro planner, released a set of measures to boost private investment in response to the private sector’s sluggish post-COVID recovery, as well as weakening economic recovery recorded in the H1 2023 economic data.

China’s private small and medium-sized enterprises (SMEs) are extremely important to the economy, having the so-called “56789” characteristics – contributing to over 50 percent of China’s tax revenue, over 60 percent of GDP, over 70 percent of technological innovation, absorbing over 80 percent of urban employment, and accounting for over 90 percent of all businesses.

The document contains 17 measures for boosting private investment. They include encouraging private capital in major national and key industry supply chain projects by identifying and promoting key projects for private investment, providing the necessary financial and resource support for private investors, and fostering a healthy and transparent environment that is beneficial to private investment.

For more information on these measures, see our article on Understanding China’s New Measures to Boost Private Investment.

Measures to attract foreign investment

The Chinese government has been actively seeking to attract foreign capital since reopening, with high-level officials highlighting the important role that foreign companies will play in China’s post-pandemic recovery. However, as we have seen, FDI in 2023 has remained stubbornly low, highlighting the challenges faced by foreign companies in the post-COVID era.

To this end, the government has ramped up efforts to attract foreign direct investment in China by optimizing the business environment for foreign companies and investors.

In August, China’s State Council released a comprehensive set of guidelines providing clear directives to local governments to tackle some of these challenges. The document, titled The Opinions of the State Council on Further Optimizing the Foreign Investment Environment and Intensifying Efforts to Attract Foreign Investment (the “Opinions”), contains 24 suggestions for attracting foreign investments, ranging from improving intellectual property rights to facilitating cross-border data flows.

The Opinions spurred cautious optimism among foreign business organizations in China, with the EU Chamber of Commerce in China stating that they “could go a long way to improving business confidence if they are implemented in a timely, coordinated and consistent manner”.

Some local governments also followed suit – in April and May of this year, Shanghai released measures aiming to attract foreign investment and improve the business environment in the city.

Read more about China’s efforts to attract foreign investment in our article here.

Measures to ease cross-border data flow

Perhaps the most significant proposal to facilitate business for foreign companies came in September when the Cybersecurity Administration of China (CAC) released a set of draft measures proposing to ease regulations on cross-border data flows.

The Regulations on Standardizing and Promoting Cross-Border Data Flows (Draft for Comment) (the “draft regulations”) offer several mechanisms for easing the requirements for companies to export data overseas.

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These include waiving the requirement for companies to undergo certain cumbersome approval mechanisms to export certain volumes and types of data and personal information overseas, if said data or PI meets certain requirements.

The draft regulations also stipulate scenarios in which the export of data or PI is deemed necessary and therefore not subject to the approval mechanisms. In addition, it provides concessions for the export of certain types of restricted data if the restricted data has not been clearly defined as such in relevant regulations, which would relieve uncertainty for companies handling data that is potentially – but not definitively – classified as “important” (and therefore subject to export restrictions).

If passed in their current form, the draft regulations will make compliance with China’s CBDT regulations significantly easier for many foreign companies. The move has also been welcomed by foreign business groups, with the EU Chamber of Commerce in China’s Vice President Stefan Bernhart stating that “It is positive that China’s relevant authorities are signalling an intent to optimise the country’s data regulations”.

For more information on the draft regulations, see our article on Easing Cross-Border Data Transfer Rules.

RMB 1 trillion in Special Treasury Bonds for disaster recovery

On October 24, China’s central government confirmed that it will issue an additional RMB 1 trillion (approx. US$141.2 billion) worth of special treasury bonds (STBs) in the final quarter of 2023. The China treasury bonds will help with post-disaster recovery and reconstruction following a summer of severe natural disasters in several areas of the country.

The additional funds are meant to support local governments with post-disaster recovery and reconstruction, make up for shortcomings in disaster prevention, reduction, and relief, and improve China’s resilience against natural disasters. This decision comes after several areas of China experienced natural disasters over the last few years.

The additional bonds will be issued in two batches, with RMB 500 billion (US$70.6 billion) in the fourth quarter of 2023 and the other RMB 500 billion carried forward to be used in early 2024.

While the issuance of additional STBs will offer a significant funding boost for local governments – and thereby help grow the local economy – central government officials have been clear that the funds are meant to help with disaster relief and prevention and therefore are not direct stimulus.

However, the additional bond issuance may also be a pragmatic move to maintain steady infrastructure investment in the final quarter of the year, as local governments run out of another key infrastructure financing tool, special-purpose bonds (SPBs).

In March 2023, the government set an annual quota of RMB 3.8 trillion (approx. US$536.7 billion) for its local government SPBs. Local governments were required to issue all of their SPB quotas by the end of September 2023 and invest all of the funds raised into projects by the end of October 2023. This means funding for further investment through the end of the year will have dried up.

Read our article on China’s Issuance of RMB 1 Trillion in Special Treasury Bonds to Local Governments for more on this topic.

China to beat 2023 targets, but economy may slow in 2024

Following strong growth in the second and third quarters and positive indicators in October and November, it is now all but certain that China’s economy in 2023 will meet its main target.

Independent analysts agree – in November, on the back of strong economic numbers in the second and third quarters, the IMF revised its GDP growth forecast up from 5.2 percent to 5.4 percent year-on-year. A month earlier, Citigroup had revised its forecast up from 5 percent to 5.3 percent year-on-year.

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In addition to the positive GDP data, it is also significant that some of the economic weak points experienced in 2023 have already begun to improve in recent months. Foreign trade, for instance, which has contracted for much of the year, has reversed course in the last two months, signaling a possible turning point going into 2024.

Although China is on target for 2023, between ongoing systemic issues such as high levels of local government debt and the property sector woes, as well as the high bar for comparative growth set in 2023, analysts predict that growth will slow in 2024. The World Bank projects a 4.5 percent year-on-year expansion in 2024, while the IMF has set the rate at 4.6 percent.

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