China’s economy grew by 4.9% year-on-year in the third quarter of 2023, surpassing market expectations and accelerating from the previous quarter, according to data released by the National Bureau of Statistics (NBS) on Wednesday.
The strong performance reflects the continued recovery of the world’s second-largest economy from the impact of the COVID-19 pandemic, which caused a historic contraction of 6.8% in the first quarter of 2022.
Robust Growth Across Sectors
The NBS data showed that all major sectors of the economy registered robust growth in the third quarter, with industrial production, retail sales, fixed-asset investment, and foreign trade all exceeding forecasts.
- Industrial production rose by 4.5% year-on-year in September, up from 4.2% in August and beating the consensus estimate of 4.3%. The manufacturing sector, which accounts for more than a quarter of China’s GDP, expanded by 5.1% in September, while the high-tech industry grew by 7.8%.
- Retail sales increased by 5.5% year-on-year in September, up from 5.1% in August and surpassing the consensus forecast of 5.2%. The growth was driven by strong consumer demand for automobiles, catering services, cosmetics, and jewelry.
- Fixed-asset investment rose by 6.8% year-on-year in the first nine months of the year, up from 6.6% in the first eight months and above the market expectation of 6.7%. The private sector, which accounts for more than 60% of total investment, grew by 7.1% in the January-September period, while the public sector increased by 6.3%.
- Foreign trade surged by 12.9% year-on-year in September, up from 11.6% in August and well above the consensus estimate of 10%. Exports grew by 13.2%, while imports rose by 12.5%. China’s trade surplus widened to $58.9 billion in September, from $58.3 billion in August.
Challenges and Risks Remain
Despite the impressive growth figures, China’s economy still faces many challenges and risks in the fourth quarter and beyond, as the global pandemic situation remains uncertain and domestic issues such as debt, property, and environmental problems persist.
- The COVID-19 pandemic continues to pose a threat to China’s economic recovery, as new outbreaks have emerged in some regions and countries, leading to lockdowns and travel restrictions that could affect trade and tourism. China has maintained strict border controls and quarantine measures to prevent imported cases, but this has also limited its inbound and outbound flows of people and goods.
- The debt problem remains a major concern for China’s financial stability, as the country’s total debt-to-GDP ratio reached 317% at the end of June, according to the Institute of International Finance. The government has tried to rein in excessive borrowing and leverage by tightening regulations and cracking down on shadow banking activities, but this has also increased the default risks and financing costs for some sectors and enterprises.
- The property sector, which accounts for about a quarter of China’s GDP, has shown signs of cooling down amid tighter credit policies and regulatory measures to curb speculation and prevent bubbles. The NBS data showed that property investment grew by 10.9% year-on-year in the first nine months of the year, down from 11.6% in the first eight months. The sales volume and prices of new homes also declined in September.
- The environmental issue is another challenge for China’s economic development, as the country faces increasing pressure to reduce its carbon emissions and achieve its goal of peaking carbon dioxide emissions before 2030 and reaching carbon neutrality before 2060. The government has launched a series of policies and initiatives to promote green development and energy transition, but this will also entail significant costs and adjustments for some industries and regions.
Outlook and Policy Implications
Looking ahead, most analysts expect China’s economy to maintain its growth momentum in the fourth quarter and achieve its annual target of above 6% for 2023. However, they also caution that the pace of recovery may moderate as the base effects fade and the external and internal headwinds increase.
As for the policy implications, most experts believe that China will maintain a prudent monetary policy and a proactive fiscal policy in the coming months, while fine-tuning its measures according to changing conditions and needs.
- Monetary policy: The People’s Bank of China (PBOC), China’s central bank, is likely to keep its benchmark interest rates and reserve requirement ratios unchanged for the rest of the year, while providing sufficient liquidity and credit support to the real economy, especially the small and medium-sized enterprises and the sectors hit hard by the pandemic. The PBOC may also use targeted tools such as the medium-term lending facility (MLF) and the targeted medium-term lending facility (TMLF) to lower the funding costs and guide the market interest rates lower.
- Fiscal policy: The Ministry of Finance (MOF), China’s finance ministry, is expected to increase its fiscal spending and accelerate the issuance and use of local government special bonds in the fourth quarter, in order to boost infrastructure investment and public services. The MOF may also extend some of the tax and fee cuts that were introduced to cope with the pandemic impact, such as the value-added tax (VAT) reduction and the social security contribution waiver.