OECD Economic Outlook, Volume 2023 Issue 1

China

Economic growth will rebound to 5.4% in 2023 and 5.1% in 2024. Lifting zero-COVID restrictions has released pent‑up demand for in-person services, increasing revenues in services industries hard hit by lockdowns such as tourism or entertainment. Easing of housing-related prudential regulations and lower mortgage costs have stabilised property sales. Carryover of sizeable infrastructure projects from the previous year will fuel a construction boom. Export growth will be tempered by weak global demand. Consumer price inflation will remain benign due to a moderate recovery of domestic demand.

Monetary policy has become more supportive with a series of interest rate and reserve requirement cuts. The capital outflows and significant currency depreciation seen in 2022, have started to reverse since the reopening of the economy. Tax and user charge deductions and exemptions for targeted groups will provide some support, in particular for small and micro firms. The recovery in the housing sector will boost budgetary revenues. While demand support is needed until the recovery firms, measures should be subject to cost-benefit analysis. Structural reforms to ensure a level playing field should be stepped up to foster the recovery of private firms. Strict implementation of equal pay laws and affirmative action where needed would reduce the gender wage gap and allow women to realise their potential.

Lifting zero-COVID19 restrictions has released pent-up demand for services and ended supply-chain disruptions

GDP growth rebounded in the first quarter of 2023 to 4.5% year‑on‑year. The rebound reflects the lifting of COVID‑19‑related restrictions. In-person services, including catering, accommodation, tourism and entertainment, which were restricted during lockdowns, rebounded strongly. In contrast, consumption of goods, which continued even during lockdowns, remains weak. Despite the current momentum in services consumption, overall consumption is constrained by relatively high unemployment rates and a large number of graduate students entering the labour market this year. Investment growth is firming as infrastructure investment is picking up and new support measures contain the contraction of real estate investment.

China: Economic growth and housing indicators

Source: CEIC database.

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China: Demand, output and prices

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China: Interest rates and monetary indicators

1. Core shadow banking items include entrusted loans, trusted loans and undiscounted bankers' acceptance.

Source: CEIC database.

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China is relatively well insulated from global food and energy market shocks. China has a large share of food in its consumption, but this has limited import content. Large grain reserves and export restrictions in the form of quotas will continue to mitigate the impact of rising global grain prices on domestic inflation and reduce the risk of shortages. Domestically produced coal is used for heating, which is not affected by higher prices in global markets. However, China is more dependent on oil and gas imports. Replacing part of crude oil imports by discounted Urals oil from Russia is containing inflationary pressure and LNG reserves are being refilled from Russian sources. The revival of demand may increase price pressures, but the overall inflation environment remains benign.

Monetary and fiscal policy will continue to support the recovery

Monetary policy continues to support the recovery and ensure adequate liquidity. While the benchmark lending rate remained stable in recent months, the required reserve ratio has recently been cut slightly. Capital outflows and currency depreciation during 2022 were halted by revived confidence following the opening of the economy. Market rates have fallen more than the benchmark rate. Following the coordinated cut of the deposit rate by major state lenders in September 2022, a new mortgage rate adjustment mechanism for first mortgages was introduced in early 2023. This allows local authorities to decide whether to remove the mortgage interest floor in cities in which new housing prices decrease for three consecutive months. More stringent implementation of credit quotas for pre‑sold housing, lower provident fund lending rates for first‑time buyers, and other measures have helped the property market bottom out, and will support the recovery of the property sector. The rebound, however, will be moderate as restrictions, including on eligibility to purchase real estate, continue to suppress demand. Shadow banking appears to have stabilised and credit supply is ample, but demand is rebounding only gradually. Savings accumulated during the lockdowns may be used partially in the real estate market if it recovers more strongly, and partially for household consumption.

Fiscal policy will continue to provide support through tax cuts and exemptions, but tax and charge deferrals have mostly ended. Some proceeds from special local bonds issued in 2022 are being spent this year. New policies are being announced to boost the recovery, including tax exemptions for small and micro enterprises and accelerated deduction of research costs. Development banks are providing funds financed by bonds to support investment, as a lack of funds has constrained the roll-out of infrastructure projects. Sizeable interest subsidies continue to support re-lending for manufacturing, social services, small and medium-sized companies, and individual businesses.

Activity will recover gradually

Following the lifting of COVID-19 restrictions, GDP growth will gradually return to its estimated potential rate. Infrastructure investment will remain robust and real estate investment will stabilise due to lower mortgage rates and improving consumer confidence. Exports will recover as global demand rebounds. Export growth will be driven by the global need for equipment for the energy transition. Reopening will boost tourism imports but import growth may be contained by an increasing reliance on domestic inputs. Raw material demand will be kept high by infrastructure investment. Longer‑term growth prospects have diminished as the population ages, constraining the strength of the recovery. A further rise in corporate defaults will improve risk pricing, but may adversely affect the financial sector and private investors. A stable supply of energy and grains will continue to contain price increases, keeping headline inflation benign.

Relatively high unemployment, especially for youth, slow job creation and a more gradual recovery of consumption remain a key downside risk. Continued credit events and disorderly deleveraging in the overstretched property sector may trigger failures of smaller banks and shadow banking institutions. By contrast, relaxing prudential measures and encouraging investment in real estate would likely create another bubble and subsequently cause greater future disruptions. A stronger rebound of housing prices could divert savings to the real estate sector and revive housing‑related consumption.

Structural reforms are needed to reinvigorate the economy

Reforms to enhance competition would sustain the economic recovery from the pandemic. Administrative monopolies, often with exclusive rights to provide certain goods and services, should be dismantled. Recent measures aimed at creating a single domestic market are a welcome step. Stronger consumer protection could boost competitive pressures. Levelling the playing field would support private sector investment and underlying growth. Fundamental reforms to strengthen the social safety net would help to reduce precautionary saving and rebalance demand from investment to consumption. Pension and unemployment insurance coverage should be extended to all. The list of treatments and medicines covered by health insurance should be widened. The extension of the pensionable age is urgent and a target age should be reached within a short time span given relatively long life expectancy. Women should not be allowed to retire 5‑10 years earlier than men. China has a large imbalance in the population due to the long‑term favouring of boys over girls, in particular in rural areas. While this is changing with urbanisation and rising living standards, there is ample room for policies to ensure greater gender equality. Girls’ tertiary enrolment is high and so is female employment, but there is a persistent wage gap, and few women are in managerial positions. Strict implementation of equal pay laws and where needed, affirmative action could help.