Half a year into China’s reopening after COVID, private economic activity remains weak

After three years of COVID isolation, China was hoping to enjoy a strong economic rebound, powered in part by private economic activity. To boost morale, the Chinese leadership has repeatedly pledged support to the private sector this year, including the announcement in July of a 31-point pledge to support nonstate business entrepreneurship.

But the private sector growth that the government was hoping to see has not happened. Its repeated supportive rhetoric has done nothing to improve the business environment for private companies. In fact, latest data from China suggest that private economic activity remains weak, and in some respects, it is even worsening, raising concerns about the country’s stalling recovery.

New data show that entrepreneurs remain reluctant to invest. The Chinese economy expanded at 5.5 percent in the first half of 2023. It is on track to reach the government’s 5 percent GDP growth target for the whole year, but that target was a conservative one in the first place. Moreover, the recovery lost momentum in the second quarter of 2023 after some initial frenzy following the abolition of the zero-COVID policy at the end of 2022. Compared with the first quarter of 2023, China’s economy in the second quarter grew by only 0.8 percent.

A clear signal of weak business confidence came in the form of a 0.2 percent decline in private-led fixed asset investment in the first half of 2023 compared with the first half of last year. In comparison, as shown in figure 1, state-led investment expanded more than 8 percent during the same period. Even in 2022, when much of China was under zero-COVID lockdowns, private investment growth was still positive. But at a time when there are no zero-COVID restrictions on movement anymore and much monetary policy easing, an outright contraction reflects ominously on the vitality of private enterprises in China.

Some nonofficial data sources suggest business conditions for private firms have deteriorated even in recent months. The Cheung Kong Graduate School of Business (CKGSB) in China, for example, surveys more than 300 alumni and current students, who are mostly private entrepreneurs of small and medium-sized companies, about the sales, profits, financing environment, and inventory of their firms every month. Its latest survey suggests that the business environment for private companies has been sliding significantly on all counts since May 2023.

The Peterson Institute for International Economics’ semiannual tracker on the ownership composition of China’s largest companies also shows a visible retreat of private companies among China’s largest listed firms in the first half of 2023. The market capitalization share of private-sector companies dropped from its peak at 55 percent as of end-June 2021 to only 39 percent as of end-June 2023, while the state sector’s share expanded to more than 60 percent.

The Chinese leadership’s 31-point pledge, issued on July 19, promised to improve conditions for private enterprises. To prime the pump, China’s top economic planner, the National Development and Reform Commission, recently identified industries and state projects newly open to private investment, including transportation, water, clean energy, new infrastructure, advanced manufacturing, and mechanized agriculture. Authorities have also promised better access to credit and improved information flows to facilitate lending. But similar pledges and lists have been made with little impact on the private economy, and entrepreneurs will remain reluctant to invest in an uncertain policy environment.

Households remain cautious on spending and continue to build up savings

Chinese consumers also remain cautious on spending, especially on big-ticket items and durable goods. Retail sales growth has slowed to only 3.1 percent in June compared with the strong rebound of 18.4 percent in April. While the first half of 2023 recorded an 8.2 percent growth in retail sales, consumption of property-related durable goods, including home appliances, furniture, and building and decoration materials, remains weak. Sales of building and decoration materials contracted 6.7 percent in the first half of 2023 compared with the same period last year. Automobile sales also slowed in the first half, with a 1.1 percent contraction in June after a sales frenzy earlier in the year, partly driven by the intensive price competition among major electric vehicle producers in China, including Tesla and BYD.

At the outset of China’s COVID reopening, some thought that pent-up demand would spur consumption and reduce household savings. But that has not happened. Instead, Chinese households’ deposits through the first half of 2023 reached an all-time high of 132 trillion yuan (see figure 2). In the first half of 2023, household savings surged by almost 12 trillion yuan, which is more than 15 percent higher than the levels in the first half of 2022.

Chinese households seem even more worried about their jobs and income now than during much of the pandemic. When asked whether they would consume, invest, or save more in the coming weeks, 58 percent of Chinese depositors said they would save more, according to the People’s Bank of China’s depositor survey for the second quarter of 2023 (see figure 3). Almost the same response was found in the second quarter of last year. In short, momentum in consumer spending seen in China’s 2023Q1 growth has proved short-lived.

Youth unemployment is alarmingly high

As the overall surveyed urban unemployment rate dropped from 5.5 percent in January 2023 to 5.2 percent in June, the youth unemployment rate rose rapidly from 17.3 percent to an alarming record level of 21.3 percent over the same period. Youth unemployment is usually the highest between June and August as new graduates look for jobs, but the jobless rate in the 16-24 years age group in July will most likely go even higher than the norm. A weakening private sector is one cause, because that sector provides the majority of urban jobs in China. The high youth jobless rate also reflects a surge in the number of college graduates of 1.5 million in 2022 and a further increase of 1 million in 2023, compared with an average yearly increase of only 280,000 in colleague graduates between 2016 and 2021, as shown in figure 4. This cohort bump is the result of students’ decisions to postpone entering the labor market and instead pursue further education during COVID, hoping the job market would improve.

While the official number looks alarming, only 6 percent of Chinese youth aged between 16 and 24 years are looking for jobs but have not found one. The 16-24 years age group is smaller relative to older cohorts because of China’s declining birth rates in the past two decades. And a smaller share of people in this age group relative to older cohorts is covered in unemployment surveys, because most young people in this age group are still in school or plan to pursue further education. According to China’s National Bureau of Statistics, only 33 million young people in the 16-24 years age group were actively looking for jobs and thus covered in the unemployment survey, which is only about a third of the population in the age group. A jobless rate of nearly 20 percent means around 6 million young people in the age group were unemployed, which was just 6 percent of the entire age group.

However, a complicating factor is that those who have graduated but are not actively looking for jobs are not included in unemployment surveys in China. There were about 16 million of them in March 2023, according to estimates by Professor Zhang Dandan of Peking University. They include those who are taking a gap year after school and also those who are “lying flat” and do not wish to have a job at all. Taking them into consideration, the total unemployed youth may be over 22 million, or more than 20 percent of the entire 16-24 years age group. And the “actual” youth unemployment rate back in March could be as high as 46.5 percent, according to Professor Zhang, in contrast with the official 19.6 percent published by the statistical authority for the same month.

The overall picture painted by China’s 2023Q2 GDP estimates is one of an economy failing to sustain the rebound that followed the lifting of the stringent zero-COVID policy. Both private sector investors and households appear to be mired in uncertainty and anxiety, as the government hustles to reassure and motivate them back to activity.