ChinaPulse: In transition to an endogenous demand driven growth mode

In transition to an endogenous demand driven growth mode

By Lin Li
May 17, 2023

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In transition to an endogenous demand driven growth mode

Key Points

China’s April economic data disappointed the market. The 18.4%yoy growth of retail sales and the 5.3%yoy of IP were largely due to the favourable base effect.
Month-on-month changes of indicators depicted a more precise and downbeat picture of the Chinese economy, with both IP and FAI contracting, sales expanding by a milder pace than March, and sales/investment/floor space started of property sector activity all worse off in the month.
Details of retail sales and services activities show that the economy still mainly benefited from the release of pent-up demand due to the relax of Covid-19 policies, and not yet driven by endogenous demand yet in this April.
Bright spots existed in April data: 1) the production and FAI of manufacturing remained resilient, particularly for automobile, general equipment, and electric machinery & equipment, due to structural opportunities implied by China’s 14th Five-Year Plan in maintaining a stable share of manufacturing industry; 2) medium to long-term loans to corporates were strong in March and April, implying stronger corporates investment ahead.
With the youth unemployment rate at a record high 20.4%, and a near-zero 0.1%yoy headline CPI inflation, alarmed a risk of deflation due to weak demand. To cultivate endogenous growth drivers and promote a steady growth, further stimulus is needed, especially fiscal support.
We still see a faster GDP growth in H2, and expect a 5.5%yoy GDP growth for 2023. Although CNY may remain stressed in near-term, we still foresee a stronger CNY in 12-month horizon, albeit a bit more modest than previous forecasts, we expect USD/CNY to reach 6.85 by the end of Q2, 2023, 6.65 by the end of 2023.