Economy Watch | China

Strong Q3 Consumption Unsustainable, but Stimulus to Support Investment Growth

November 03, 2023

Trusted Insights for What's Ahead™

• Status of China’s Economy – Q3 y-o-y GDP growth came in well above market expectations, jumping to 4.4 percent (measured in two-year average terms, to better account for base effects), compared to 3.4 percent y-o-y in Q2. On a year-to-date basis, two-year average GDP grew from 4 percent in Q2 to 4.1 percent in Q3. The increase was driven in great part by the release of pent-up demand during the first post-COVID-19 summer holidays. While this momentum in consumer spending is unlikely to continue, GDP growth in Q4 was always going to benefit from the ongoing stimulus measures to prop up investment and because of the low base effect of 2022 Q4. Given the unexpected strong growth in Q3 and our expectations for stable growth in Q4, we have revised our 2023 GDP forecast to 5.2 percent from 4.8 percent previously.
• Investment Trends – Growth in fixed asset investment (FAI) remained stable in September at 4.5 percent y-o-y (measured in two-year average terms), thanks to the positive impact that the front-loading of local government bond issuance had on investment in infrastructure. We expect this to continue being the case throughout the end of the year thanks to a newly announced special government bond issuance worth RMB 1 trillion and a RMB 1.5 trillion local government debt swap program. A major offset will be the continued contraction in real estate investment, though overall FAI growth should remain stable in Q4.
• Consumption Trends – Household spending grew strongly in Q3 by 8.2 percent y-o-y, outpacing the 6.2 percent y-o-y increase in disposable income by a considerable margin (both measured in two-year average terms). This spending was driven by a release of pent-up demand, and is not indicative of a sustainable recovery in consumer confidence. The low base of 2022 Q4 and marginal improvement in income and employment will help support consumption growth, but it will be difficult to maintain Q3’s growth momentum in Q4.
• Trade Trends – Exports rebounded slightly in September but remained in negative territory, declining 6.2 percent y-o-y, up from -8.8 percent y-o-y growth in August. The September uptick is largely due to base effects rather than an actual improvement in external demand. The manufacturing PMI’s new export orders subindex remained below the 50 mark. Against the backdrop of the global economic slowdown, we see little short-term upside for exports. 
• Implications for Business – The Chinese economy stabilized in September. The newly announced stimulus will help further support growth in Q4, but is not big enough to generate an upswing cycle. If October investment data comes in below market expectation, this will increase the likelihood of further, stepped up monetary and fiscal measures.