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 provincial governments have also proposed various policies to stimulate the consumer market:

• Shanghai: Continue to subsidize the replacement of vehicles with EVs.
• Zhejiang: Provide subsidies for license plates and parking fees for EVs.
• In terms of catering and tourism, all provinces have proposed agendas based on their comparative advantages.
• Shanghai: Promote red tourism, ancient town tourism, industrial tourism and health tourism.
• Hainan: Hold brand exhibitions such as the Third Consumer Expo, create a landmark project of an international tourism consumption center and promote duty-free shops.
• Guangdong: Improve the three-level logistics system in counties and villages; 1,530 provincial key construction projects with annual planned investment of RMB 1 trillion.

Housing market has fewer restrictions, but no stimulus

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.

Chinese exports still weak in Q1 but may accelerate in the second half of 2023

China benefited from booming exports in late 2020 and 2021 due to the pandemic. But shipments slowed over the course of 2022 as global economies reopened, consumers shifted spending from goods to services and supply chain issues hurt manufacturing.

Early this year, stacks of empty containers at ports triggered concerns of plummeting exports, but these were actually caused by the timing of the Chinese New Year holiday and an abundant supply of new containers – three times more than in average years; for the past two years, China’s Container Throughput Index has still been significantly higher than overseas countries.

We believe that exports will gradually start to turn higher later this year, in conjunctions with improvements in the global economy. The concerns that may affect Chinese exports and hold back growth largely relate to trade tensions with the US and how long inflation lingers.

The trade war with US that began in 2018 caused China’s trade share to the US to drop 6 percentage points from 22% to 16%. Now, ongoing tensions around key technologies and efforts to diversify supply chains could dampen future growth. US sanctions may prevent China from accessing some key materials/parts and affect manufacturing and final goods delivery.

But considering the stickiness of the export orders with potential difficulties in switching suppliers due to quality concerns, finding qualified labor and logistics, we expect this shift to be gradual with China still having many advantages.

China’s economic recovery will gradually build momentum in second half of 2023

Overall, China’s economy has passed the darkest moment and it is on a gradual recovery, although it still faces many headwinds.

The government has issued various policies to boost consumer confidence and improve corporate investment. Exports, which now are no longer the driver of the economy that they were in recent years, should at least become more supportive in the second half of the year, and the property market will serve more as a stabilizer of the economy instead of a booster.

Our forecast assumes that economic improvement will start gradually in the second quarter and build momentum over the second half of the year.

The post China’s economic recovery: an analysis on Chinese domestic demand appeared first on Fastmarkets.

In the last 20 years – five times – electricity controls often happened during a peak time of electricity consumption (during the hottest and coldest weather), lasted less than one month, affected only industrial production and on a much smaller scale. This time, the electricity controls and energy shortages were triggered by actions taken by provincial governments working to achieve their assigned Key Performance Indicator (KPI) to lower carbon emissions.

China does not have a shortage of coal to generate electricity. The country produces the largest amount of coal in the world. However, the quality is not particularly good so China imports a small portion of good-quality coal from abroad. The trade friction with Australia has only had a minor impact on available coal supplies. Australia accounts for less than 2% of China’s total coal consumption so this issue only affected the market price for a short period of time.

Now the Chinese government is driving to lower the country’s dependence on coal. They have announced the country’s intentions to reach carbon neutrality by 2060. Weaning itself off of coal will be a gradual process, but the central government has quantitative goals for each provincial government to achieve.

Coal prices trigger government crackdown

These goals used to be soft targets with no hard punishments, but in September 2021, the goals became hard targets, which changed how the local government treated them. Speculation on the futures market took advantage of that during the electricity shortage to push up the price. The skyrocketing coal price caught the eye of the central government as it caused market disruptions and imposed heavy burdens on household utility costs, especially during the winter. The central government then cracked down on the sudden surge in energy commodity prices, including coal, by flooding the market with an enormous amount of coal inventory. This increased the margins in the futures market drastically. Along with with a criminal investigation into the speculation, these actions brought prices back down in October and November.

China’s domestic coal price is market-based, while its electricity price is set by the National Development and Reform Commission (NDRC). So, when coal prices soar, electric companies are less motivated to generate electricity since it is not profitable and, in some extreme cases, the more they produce, the more money they lose. Still, since large electric companies are all state-owned enterprises (SOEs), it is only some of the small electric companies that become reluctant to produce. Accordingly, the impact is typically not that big, and may only last a few days or a few weeks maximum – normally during the summer heat.

Electricity control extended to households

This time, the shortage was more severe than previous years, partially due to the overlap between the timing of extreme weather, soaring coal prices and booming goods exports, which kept manufacturing running strong. But as indicated above, the most important factor behind the shortages was the carbon emission quota/reduction KPI.

In the past, electricity controls only affected industrial production, and household electricity is seldom affected, so many people in China are not even aware there is electricity control. But that was not the case this time, with half of the nation affected and many people’s lives impacted for a few weeks. There were examples of incidents in September 2021 when the electricity control cut traffic lights in some northeastern cities and created chaos.

In recent years, China has established a plan to diversify and optimize its energy, including the target of a percentage of green energy usage and carbon emissions goals. CO2 carbon emissions reduction is part of this plan.

There are KPIs on every level of government to reduce carbon emissions and increase new clean energy usage, and the KPI is used in evaluating the political achievements of each government and person in charge.

Before 2019, the KPI was comparatively easy to reach and no hard punishments were handed out. Inner Mongolia was the only province that failed to achieve its KPI in 2019.

In 2020, the KPI became less stringent due to Covid-19 and other concerns. Thus, energy consumption in 2020 only declined 0.1% year over year, which left more work to be done in 2021 to catch up.

Provinces struggle to meet energy KPIs

In the second half of 2021, nine provinces failed to achieve their KPIs, including Qinghai, Guangxi, Guangdong, Fujian and Jiangsu. These provinces received a Level 1 warning, and each provincial government and the officials in charge were called on to take responsibility, which triggered a chain reaction by the government to control energy usage and carbon emissions to guarantee the KPI can be reached in future assessments.

There are several factors that pushed up energy usage in 2021:

• Increased consumer goods consumption due to Covid-19 increased energy consumption for exports
• Extreme weather during the summer, including the historical flood in Henan and the extreme heat in the southern provinces
• The development of the solar industry and electric cars. Electric cars have the potential to save energy in the future. However, currently electric cars require a lot of energy to manufacture, making them a little less green.

Now every level of government is taking carbon emission KPIs seriously. Several detailed policies have been issued to guarantee higher energy usage efficiency and lower carbon emissions per unit of gross domestic product (GDP) and to promote the usage of new, cleaner energy sources. It is reasonable to assume the tight balance of coal/electricity supply – the government is able to control the supply of coal in general – will last for a few years during the energy structure transitioning, and green energy investment in China will burgeon.

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