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China’s economic recovery: an analysis on Chinese domestic demand

China’s economy has been on a slow path to recovery since the end of its strict Covid-19 restrictions in 2022. Since then, the eyes of many have been focused China’s economic recovery.To get more China economy news, you can visit shine news official website.

In this article, we will analyze the strength of China’s economic recovery so far using domestic demand as our indicator and evaluate what we could expect from one of the biggest driving forces in commodity markets in 2023.

China focuses on domestic consumption for economic growth
There were some expectations of a strong consumer market recovery in post-Covid China after the reopening in December 2022, but that long-expected “revenge consumption” has not yet appeared. Retail sales grew 3.5% year over year in January-February this year and travelling during the Chinese New Year showed only a mild recovery.

One of the reasons the recovery has not been more vigorous is that the growth in household income stagnated in the past year. Consumers have generally reduced their expenditures and increased their precautionary savings for uncertainties. It will take some time to boost consumer confidence and release pent-up demand.
The Central Economic Work Conference at the end of 2022 pointed out that “consumption such as housing improvement, new energy vehicles, and elderly care services should be prioritized”. This suggests that the government wants local consumption to be the main engine driving China’s economic growth in 2023.

Automobiles, home appliances, catering and home furnishings account for about 25% of total consumer retail sales. Within this group, automobiles accounted for 10% of total consumer retail sales, or 15% when including fuel consumption.

The Chinese Ministry of Commerce has published their agenda for this year: Stabilizing new car consumption, supporting electric vehicle (EV) consumption, expanding the circulation of second-hand cars and improving car recycling.
The real estate sector has significant importance to China’s economy, as the whole industry chain accounts for close to 25% of China’s total GDP.

After three years of controls on the housing market, including limiting the financing channels for developers, setting the price ceiling on new/second-hand house transactions and controlling speculation, there are some signs of easing of the restrictions. However, the government’s intent is to provide some stability to the market while not giving up its efforts to reduce overexuberance in the market.

Policymakers insisted during the Central Economic Work Conference that real estate should not be used as a short-term means to stimulate the economy, but as a way to improve housing demand for new citizens and young people.For real estate, we believe that the government’s goal in easing its policy is not to provide a strong stimulus on the demand side, but to moderately adjust the previous restrictive policies to release effective demand.

On the supply side, we believe the government wants to promote industry restructuring and mergers and acquisitions, effectively prevent and resolve the risks of high-quality leading property development enterprises and improve their balance sheets.

The real estate sector in Tier 1 and some strong Tier 2 cities could benefit more from this round of policy easing with turnover rates rebounding and mild price increases. Tier 3 and below cities will still suffer from oversupply and population outflow.