China: economic surprises and disappointments in 2023

Aug 17, 2023

By Alex Brazier and Serena Jiang | Fading economic momentum after a rapid post-Covid reopening has revealed China’s sluggish underlying activity - and the latest data have only underscored that.

China faces the twin challenge of weak consumer and export demand. China’s restart has not generated the “animal spirits” expected: consumers have been reticent to spend, and real estate activity has been feeble. And while China has found some new sources of export demand, exports are – as we expected – falling. And policy stimulus remains measured and targeted, even with this week’s cut to two key policy rates.


Overall, we cut our expectations for growth this calendar year to around 5%. Growth of 5% may not sound too bad, but it’s boosted by the restart of activity. A better indicator of how challenging things are is the two-year average growth over 2022-23, which smooths through the shutdowns and restarts. That’s set to be only around 4%: much lower than China’s pre-Covid trend growth rate of about 5%.

Stalling consumer recovery

China’s property sector and household spending – both key for growth – have disappointed while bank loans to companies tumbled in July pointing to declining business confidence. The real estate sector’s recession worsened in the second quarter after a fleeting release of pent-up demand at the start of the year. This is evident across a suite of indicators ranging from house prices, transactions and new starts to property investment. That comes on top of market concerns about a struggling private property developer that has renewed fears about financial stress in the real estate sector. New home prices have declined for two consecutive months since June, according to data from the National Bureau of Statistics (NBS). New home sales fell 15% year on year in July, while overall real estate investment dropped 12.2%.Tepid house prices and moderate income growth have, in our view, stalled a consumer spending recovery. Spending remains stubbornly below its pre-Covid path (see the chart).

This chart shows that since the pandemic, China's exports of autos and car parts have far exceeded the volume of total Chinese goods.

This chart shows that since the pandemic, China's exports of autos and car parts have far exceeded the volume of total Chinese goods.


Exports a drag even with some new sources of demand

We thought Chinese exports would fall steeply as U.S. consumers rebalanced spending back to services from goods. And exports are falling – from their peak in Q1 2021, volumes are down 2% in the second quarter this year. But China has found some new sources of demand for exports to temper what could have been an even bigger fall: for its electric vehicle exports from the Middle East and its Asian neighbors.


China’s exports of autos and chassis have almost doubled in the past 18 months – surpassing Germany to become the second largest exporter of autos in 2022, according to the China Association of Automobile Manufacturers and German Association of the Automotive Industry. And it’s likely to surpass Japan in 2023 to become the largest - reflecting the country’s rising competitiveness in the sector. See the chart.

This chart shows that total real consumption remains stubbornly below its pre-Covid path

Source: BlackRock Investment Institute, with data from China’s National Bureau of Statistics (NBS), July 2023. Note: the orange line shows seasonally adjusted total consumption, accounting for inflation, indexed to Q1 2015. Total consumption comprises both public and private spending and is estimated from its contribution to GDP growth and estimated share of the GDP as outlined in NBS data. The dotted yellow line indicates the pre-pandemic trend.


China’s efforts in the development and production of electric vehicles (EVs) – and related industries such as batteries and components – have been central to this boom, in our view. The share of EV exports in total auto exports has jumped to 25% so far this year vs. just 3.6% in 2019, according to the China Association of Automobile Manufacturers. This is in part the consequence of a years-long, concerted policy effort – at both the central and local government level – to support the industry via subsidies, financial incentives and regulations, such as the New Energy Vehicle (NEV) Mandate Policy that took effect in 2018 and got a renewed push in 2021. These efforts are also closely tied to China’s focus on staying at the front of the global race for clean energy leadership.


More broadly, China has pivoted it exports to its Asian and Middle East neighbors. The U.S. remained China’s largest export destination in 2022, according to China Customs, but the switch in U.S. consumer spending from goods back to services, plus persistent strategic competition between the two powers, have weighed on trade activity: between January and June this year, the volume of exports to the U.S. shrank by 15% year on year, according to China’s General Administration of Customs and our estimates. By contrast, Chinese exports to the Middle East and ASEAN countries have risen by 9%. See the New sources of export demand chart.

This chart shows that China has a rising share of new sources of export demand outside of the U.S. in the Middle East and ASEAN countries compared to this time last year.

Source: BlackRock Investment Institute, with data from China Customs, Aug 2023. Note: the chart shows the 3-month average value of China’s exports to the U.S. and the combined exports to ASEAN and the Middle East in renminbi (value as of Jan 2015). Middle eastern countries included in the calculation are the UAE, Oman, Bahrain, Qatar, Kuwait, Saudi Arabia, Egypt, Iraq and Jordan.


What next?

Weak consumer and export demand are set to keep hobbling China’s growth, in our view. Underlying growth is set to be below its pre-Covid trend. 

The latest statement from the Politburo, the ruling Communist Party’s top decision-making body, suggests policymakers are cognizant of the risks to growth and are poised to step up efforts to revive as-yet lackluster domestic demand. But we expect them to remain measured when it comes to stimulating domestic spending and property investment. Authorities are keen to avoid credit-fueled binges of the past.

We expect authorities to press firmly ahead with policy support to try to sustain exports, especially high-end ones like EVs. But the fierce competition in high-end technology and strategic competition with the U.S. will make that more challenging than ever.

Over the longer term, China still faces the same growth challenges including an aging population and geopolitical competition as we have laid out previously.


Macro take

Get the latest insights and economic views from the BlackRock Investment Institute. Read what’s going on in the economy, why it matters and how policymakers might respond.
Camera lens

Stay ahead of markets with the latest insights from the BlackRock Investment Institute.

Please try again
First Name *
Please enter a valid first name
Last Name *
Please enter a valid last name
Email *
Please enter a valid email
Investor type *
This field is mandatory
Country *
This field is mandatory
Company *
This field is mandatory
Thank you
Thank you for your subscription!
We usually publish weekly insights on every Monday. Expect to receive your first newsletter from us this upcoming Monday.