A new consensus has emerged among many economists, journalists, and other analysts regarding the current slowdown in the Chinese economy. Their contention is that China's stumbles in spring 2023 portend a far more serious long-term problem derived from flawed, insular, and Communist Party-controlled policymaking in response to COVID and its aftermath, with likely adverse consequences for the global economy.
That widely popular assessment is likely premature and, at least in part, perhaps simply wrong.1
No doubt China faces many structural and other challenges: slumping productivity, a shrinking labor force, restrictions on the transfer of technology imposed by the United States and other countries, an ongoing real estate bubble's correction, elevated unemployment among younger workers, and a leadership that seems to prioritize party control and national security over economic growth. These challenges mean that China's growth will not return to anything close to the dazzling pace of 1980-2010, when annual growth averaged close to 10 percent.
But a careful reading of the present situation does not support the view that China's growth is now gripped by a severe cyclical downward spiral that will persist for several years.
China's headline year-over-year growth in the second quarter of 2023 picked up to 6.3 percent.2 But the year-over-year pickup was in part due to weak growth in the second quarter of 2022 and represented an increase of less than 1 percent over the level of output in the first quarter. Thus, performance in the second quarter fell short of investor expectations. The disappointing growth was partly because the expansion of household consumption on a quarter-over-quarter annualized basis fell to 15 percent compared with 33 percent in the first quarter.3 But that surge in the first quarter was the result of very weak consumption growth in the fourth quarter of 2022 combined with the government lifting COVID lockdowns in late 2022, a one-off event and thus not sustainable.
China's imports have also weakened, slumping 7.6 percent in the first seven months of 2023, potentially signaling weak domestic demand. But the "decline in nominal import growth was entirely driven by price effects."4 In volume terms imports expanded by 1.0 percent compared with a decline of 6.4 percent in the same period last year. Thus, imports in the first half of 2023 are signaling increasing domestic demand.
What about the view that households faced with increasing uncertainty have lost confidence and are slashing spending while stashing more money in bank deposits?
Bank deposits built up during the pandemic (2020-2022). This buildup may reflect the increasing fear of households that they may lose access to their assets and are prioritizing short-term liquidity, as Adam S. Posen of PIIE argues.5 But the alternative explanation is that when lockdowns were pervasive households were unable to spend, so household savings inevitably spiked, and much of this increased saving flowed into bank deposits. Household bank deposits continued to expand in the first half of 2023 at about the same pace as 2022, suggesting not much has changed. But the context is entirely different. In urban areas, for example, the growth of household disposable income in the first half of 2023 increased by more than half, so the share of household income going into bank deposits has fallen sharply. And the growth of consumption expenditure was almost ten times as rapid, also compared with the same period in 2022.6 These data strongly suggest that the saving rate of urban households is now falling.
This hypothesis is confirmed in the aggregate national data for the first half of 2023, when per capita consumption expanded by 8.4 percent, half again as fast as the growth of GDP, both measured in current prices, and easily exceeding the 6.5 percent growth of per capita disposable income.7 That suggests a turning point during the first half of 2023, leading to a reduction of the household saving rate and increased consumption spending.
What about the view that the slowdown now is depressing wages, further undermining household confidence?
The growth of average per capita wages in the first half of 2023 was 6.8 percent.8 And, considering other sources of income, such as interest and other property income, per capita after-tax income was almost three-quarters larger than wage income and rose 6.5 percent, exceeding the growth of nominal GDP.9 Thus, the share of output accruing to households is now rising, not falling.
The combination of rising personal incomes and a falling saving rate means that future household consumption growth will likely surprise on the upside.
What about the dreaded D word—deflation?
Falling retail prices could lead households to postpone consumption on the expectation that goods would become cheaper tomorrow. That would reduce consumption and economic growth. But the widely noted 0.3 percent decline in consumer prices in July 2023 compared with a year ago was mostly due to elevated food prices in the same period of 2022. Stripping out volatile prices of food and energy, core consumer prices in July rose by 0.8 percent, up from the 0.4 percent increase in June. It may be premature to raise the specter of deflation based on one month of data.
Finally, what about investment, especially private investment?
One reason for weak investment, both state and private, in the first half of 2023 is that inventories of industrial firms at the end of 2022 were at an historic high.10 China, unlike the United States, did not transfer cash to households during the pandemic. But to support household income indirectly, the government cut some business taxes and simultaneously discouraged firms from laying off workers. So in many cases production continued while sales fell, leading inevitably to a record level of inventories.
With record inventories, the short-run incentive to invest to expand production capacity in manufacturing in the first half of 2023 was weak. But in the first half inventories fell, perhaps setting the stage for increased investment going forward.
During the pandemic private investment continued to expand but weakened relative to the pace of expansion of state investment, and in the first half of 2023 private investment, for the first time ever, shrank by 0.2 percent. But private investment still accounts for over half of all investment, suggesting that government policies have eroded private property rights by less than some critics claim. Two factors were particularly important in contributing to the relative slowdown in private investment—increased regulation of internet companies and a real estate correction.
First, the government's sudden and not well thought out crackdown on internet platform companies, which are overwhelmingly private, starting in late 2020 decimated their earnings, investment, and hiring. But in July 2023 regulators gave the all clear sign, stating that problems in the financial activities of internet companies have been "rectified." The firms, including Alibaba, ByteDance, Meituan, and others responded, stepping up their recruitment of new staff, reversing the wave of layoffs by these and other private tech firms in 2022.11 Their profitability going forward under the new system of "normalized supervision" likely will be less robust than when the laissez-faire regulatory approach prevailed prior to the crackdown but certainly will rise from low levels of 2022 and the first half of 2023, boosting overall private investment growth.12
Second, year-over-year investment in property slumped 10 percent in 2022 and a further 8 percent in the first half of 2023. Private firms accounted for most real estate investment prior to the correction. So the decline in real estate investment had a large effect on the overall level of private investment. Private real estate companies are now deleveraging and unlikely to resume investing other than trying to complete presold but unfinished projects. Thus, real estate will be an ongoing drag on faster growth of private investment.
To conclude, China and its people suffered greatly during the COVID pandemic, both in terms of lives lost and economic output foregone. The analysis above suggests that economic recovery may have begun. But it is fragile. Time will tell whether recovery takes hold or whether China is falling into a cyclical downward spiral.
1. See, for example, Adam Posen in Foreign Affairs, Peter Goodman in the New York Times, Paul Krugman in the New York Times, Keith Bradsher in the New York Times, James Kynge in the Financial Times, and the editorial board of the Financial Times.
3. Goldman Sachs, China: Consumer Dashboard 2023Q2, August 7, 2023.
4. Goldman Sachs, Signals from Chinese Import Data, August 15, 2023.
6. National Bureau of Statistics via Wind.
7. See the National Bureau of Statistics of China's 2023 1H report on household income and consumption,
10. Gavekal Dragonomics, The Inventory Hangover, July 31, 2023.
11. "China's Big Tech companies revive expansion plans after Beijing vows to give the green light on more deals, ends regulatory crackdown," South China Morning Post, August 1, 2023.
12. Martin Chorzempa, Is China's Tech 'Crackdown' or 'Rectification' Over?, DigiChina Forum, Stanford University, January 25, 2023.
This publication does not include a replication package.