Executive Summary

September data shows steady recovery in industrial production and resilient growth in investment, but continued weakness in consumer-focused services. This is not surprising due to the tightening of restrictions in cities such as Shenzhen, Guangzhou, and Chengdu. This unbalanced recovery is likely to continue in the next months, thus slowing down the pace of China’s growth.

Insights for What’s Ahead

• Status of China’s Economic Recovery – September data shows steady recovery in industrial production and resilient growth in investment, but continued weakness in consumer-focused – particularly in-person – services. This is not surprising due to the tightening of COVID-restrictions in cities such as Shenzhen, Guangzhou, and Chengdu. This unbalanced recovery is likely to continue in the next months. We have therefore downgraded our China GDP growth forecasts from 3.7 percent to 3.3 percent for 2022, and from 5.3 percent to 5.1 percent for 2023.
• Investment Trends – Investment growth in infrastructure development and manufacturing continued expanding steadily in September, but so did the contraction in property investment. We expect new homes sales to bottom out soon, but stabilized sales will not be enough to reboot property investment growth. Considering that the easing of credit restrictions is being targeted at finishing stalled projects rather than building new ones, we anticipate that investment in property development will contract again in 2023.
• Consumption Trends – The reimposition of COVID-related restrictions in September resulted in weak retail sales growth and in a rise in the urban unemployment rate. Depressed consumer demand restrained inflation growth. The outlook for consumption recovery remains bleak: not only are future COVID-19 outbreaks inevitable due to the ongoing mutation of the virus, but authorities have also made clear their intention to continue pursuing a ‘dynamic zero-COVID’ strategy to face the pandemic.
• Trade Trends – China’s export growth continued to moderate in September. Next year might see a drop of export growth into negative territory given the weakening global economy, which will weigh on external demand, and because of the high base of comparison of 2022.

Implications for Business

We forecast China to grow 3.3 percent in 2022 and 5.1 percent in 2023 based on the following assumptions:

1. COVID-related restrictions will start easing in 2H 2023 thanks in part to progress in the development of new vaccines and medications;
2. The property downturn will bottom out driven by policy support and the stabilization of housing prices and sales, though investment will remain negative; and
3. Ongoing global economic weakness will lead to a moderation, but not to a precipitous fall, of external demand for China-made products.

But risks are tilted to the downside and there is growing uncertainty about China’s growth prospects given: (i) the inevitability of more COVID-19 flareups and lack of information on how restrictions will be relaxed and to what extent; (ii) the likelihood that the global economic slowdown could worsen; (iii) and the impact of geopolitical developments, such as the recent decision by the US to restrict integrated circuit (IC) exports and the components and equipment required to design and manufacture them to China.

Businesses need to be prepared for continued economic weakness, and plan ahead for the eventuality of a worse-than-expected operating landscape in 2023.