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China's Economy in the First Half of 2023 - Part 01 Executive Summary

In the first half of 2023, China's economy grew at a rate of 5.5%, with the second quarter specifically witnessing a year-over-year growth rate of 6.3%. This figure benefited from a relatively lower baseline in the previous year, marking an improvement of 1.8 percentage points compared to the first quarter. However, quarter-over-quarter growth slowed to 0.8% in the second quarter, down from 2.2% in the first quarter, reflecting a weakening momentum in domestic economic recovery. Overall, as China's economy gradually returns to normal operations, the potential for consumption is being steadily released, and the service sector continues to show positive development trends. Thus, the economy is expected to maintain its current recovery trajectory. Nevertheless, the internal driving force for economic recovery is not yet fully robust, with private enterprise confidence needing further enhancement, the real estate sector still in a bottoming-out phase, and structural employment issues among the youth becoming increasingly apparent. The foundation for economic recovery needs further consolidation. At the same time, the external environment is becoming more complex and severe, with a global economic slowdown expected to limit China's export growth. In the coming period, macroeconomic policies are expected to strengthen support, better unleashing domestic demand potential to support stable economic growth. With rising household incomes, policy support, and a rebound in consumption willingness, consumption is expected to continue to drive economic growth. Additionally, the momentum of innovation and the acceleration of green transformation are expected to inject new vitality into China's economic development. China's economy is projected to achieve a growth rate of 5.5% in 2023.


Regarding output, the value added by industrial enterprises above a designated size grew by 3.8% year-over-year in the first half of the year, an acceleration of 0.8 percentage points from the first quarter. Thanks to the lower baseline from last year, the second-quarter industrial production saw a year-over-year increase of 4.5%, accelerating by 1.5 percentage points compared to the first quarter. However, compared to the service sector, industrial production remains weak, and last year's low base did not lead to a higher growth rate for industrial added value. Enterprises are still in the process of destocking, industrial profits have declined, and with the slowdown in export growth, industrial production is under pressure. Future outlooks, based on high-frequency data such as blast furnace operation rates and cement turnover rates, suggest that capacity utilization rates improved in July, with production momentum expected to recover further.


On the demand side, consumption continues to reinforce its role in driving economic growth, with final consumption expenditure driving a 5.3 percentage point increase in the economy in the second quarter, contributing 84.5% to economic growth, an improvement over the first quarter. The total retail sales of consumer goods grew by 8.2% in the first half of the year, an increase of 2.4 percentage points from the first quarter, with a particularly evident rebound in service consumption such as catering and tourism. However, compared to the average growth rate of the past two years, the momentum of consumption growth in the first and second quarters of this year has slowed, and it remains significantly below pre-pandemic levels. The current momentum of consumption recovery remains moderate, with consumer confidence in need of further strengthening. Looking ahead to the second half of the year, with income growth warming up and macro policies further supporting the improvement in housing demand and major consumption areas such as new energy vehicles, consumption is expected to continue its recovery.


In the investment field, fixed asset investment grew by 3.8% year-over-year in the first half of the year, but slowed by 1.3 percentage points compared to the first quarter. Infrastructure and manufacturing investment continue to provide stable support, while the drag of real estate investment has become more pronounced. Private investment sentiment remains subdued, with a year-over-year decline of 0.2% in the first half of the year, registering negative growth for two consecutive months, reflecting insufficient business confidence and a lack of effective stimulation of endogenous market investment. Looking ahead, infrastructure investment is expected to maintain rapid growth with policy support. Manufacturing investment is also expected to maintain some resilience with the support of high-tech and equipment manufacturing industries. Real estate investment faces pressure from the current downturn in real estate sales, with a decline in land purchases and new construction area indicating that real estate investment will continue to operate at a low level for some time to come.


In terms of exports, calculated in US dollars, China's exports declined by 3.2% year-over-year in the first half of the year, an increase in the rate of decline by 1.7 percentage points from the first quarter. Although in the early months of the year, due to the concentrated release of backlogged orders and the enhanced competitive advantage of new energy products, China's exports performed


better than other major export-oriented economies and market expectations. However, since May, as external demand further weakened and the baseline rose, export growth turned negative again. In terms of trade partners, Russia, the five Central Asian countries, and Africa became the main growth points for China's foreign trade in the first half of the year. At the same time, trade growth with developed economies such as Europe and America and with ASEAN continued the downward trend of last year, with weakened end-demand in Europe and America negatively impacting trade with ASEAN. Looking ahead, given that the manufacturing PMI in developed economies such as Europe and America remains in contraction territory, the momentum for a rebound in international market demand is insufficient in the short term, and China's export growth continues to face downward pressure. Nonetheless, the competitive advantage of exports from new energy industry chain products such as "the new three types" is sustainable, which helps mitigate the negative impact of insufficient overseas demand on China's exports.


This section provides a detailed account of China's economic performance in various aspects, including GDP growth rate, industrial output, consumption growth, investment trends, and export dynamics. The analysis shows that despite some challenges and downside risks, China's economy is generally showing signs of recovery, with policy support and market to drive further growth.


The next article, we will share more details of China enocnomy growth.

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