Last year, car production in China set a record. Restaurants and hotels were increasingly full. Construction of new factories increased.
Yet China's economic strength masks weaknesses. Deep discounts have helped boost car sales, especially for electric cars. Diners and travelers opted for cheaper meals and cheaper hotels. Many factories have been operating at half capacity or less due to weak demand within China and are working to export more to compensate.
China's economy grew by 5.2 percent last year, recovering from nearly three years of strict “zero Covid” epidemic control measures, the country's National Bureau of Statistics reported on Wednesday. In the final three months of the year, manufacturing rose at a 4.1 percent annual pace.
For a long time, China's growth has been slow. High debt, a housing crisis that has undermined confidence, and a shrinking and aging labor force weigh on manufacturing.
Western economists forecast growth of 4.5 percent or less this year, resulting not in a cyclical downturn but rather a semi-deceleration that could last for years, what economists label secular stagnation. Prices have been falling steadily to levels China has not experienced since the shock of the global financial crisis in 2009, a phenomenon known as deflation that can bankrupt heavily indebted households and firms.
“Secular stagnation — essentially long-term savings leading to slow growth, deflation, asset bubbles and financial crises — has moved from the Western Hemisphere to China,” said former Treasury Secretary Lawrence H. Summers said in a recent interview. Week in Shanghai.
Heavy loans, and the steep interest payments they require, limit China's room for maneuver. Since the financial crisis, central and local governments have responded to economic weakness by spending more on new roads and other infrastructure and by lending more to manufacturers in favored industries. It has slowed growth.
Last month, credit rating agency Moody's issued a negative outlook for the financial health of the Chinese government. Another agency, Chicago-based DBRS Morningstar, downgraded China's government debt in November.
Rohini Malkani, senior vice president of sovereign credit rating at DPRS Morningstar, expressed concern that the overall debt of the Chinese economy now exceeds three years of economic output – more than that of industrialized countries such as the United States.
“In the last 15 years, it has doubled compared to the country's fastest growing production,” he said.
Zhang Jun, dean of the School of Economics at Fudan University in Shanghai, said in a statement. Distributed by East Is Read Newsletter The Chinese government in Beijing is less willing to stimulate the economy by borrowing and spending on infrastructure. As a result, he wrote, “I increasingly feel that recession has a certain inevitability.”
A survey of economists by Chinese news agency Caixin last week found the economy's performance last year was roughly 5.3 percent, in line with consensus. The economy met the government's target of 5 percent growth last March. Last year's increase was “about 5.2 percent,” Premier Li Keqiang said Tuesday at the World Economic Forum in Davos, Switzerland.
Many investors believe China will increase its economic stimulus, but Mr. Li insisted on Tuesday. Shanghai's stock market fell 0.8 percent and shares in Hong Kong fell 2.6 percent after the report.
Kang Yi, commissioner of the National Bureau of Statistics, said at a news conference that “the national economy has seen a rapid recovery, high-quality growth has advanced steadily, and expected major targets have been well achieved.”
On Wednesday, the statistics office resumed publishing the unemployment rate for 16- to 24-year-olds, which it stopped last summer after the youth unemployment rate hit 21.3 percent in June. The rate was 14.9 percent in December, partly reflecting a fall in youth unemployment over the winter when graduates found jobs or enrolled in further education last summer.
Mr. Kang said.
Last year's performance was a significant rebound from 2022, when the economy grew by just 3 percent. A two-month Covid lockdown in Shanghai in the spring of 2022 disrupted manufacturing across much of central China and produced a steep, nationwide drop in consumer confidence, which remains low.
Many economists predict that 2023 will show a major rebound from such a weak base. But after a strong start, spending flagged. Home prices fell, leaving families feeling less financially secure. Beijing has weakened the country's social safety net. In other measures, a year ago policymakers ended a broad unemployment insurance program put in place during the pandemic, putting pressure on people to find work.
All but the most affluent families kept a close eye on their spending. Many restaurateurs complained about a sharp drop in average tabs, while hotel executives lamented that travelers were opting for less expensive rooms.
About 6,000 restaurants in Shanghai closed during the pandemic, but another 7,500 have opened in the past year, said Chris St. Cavish, a food critic and industry analyst in China's most populous city. The growth of the industry has been almost entirely between cheap cafes that charge less than $14 per person and luxury restaurants that charge as much as $1,000 per person.
“The middle is a tough place for a restaurant right now,” Mr. Said St. Cavish.
The biggest worry about China's economy in the coming year remains the same as it has in the past two years: What will happen in the country's housing market downturn? Existing homes are already selling for less than a fifth of what they were at their peak in the summer of 2021, when buyers will be found. The speed of transactions has slowed down.
The sharpest effects of the real estate crisis are being felt in developers' struggles to raise money and launch new projects. Investors are concerned that the volume of construction could plummet as developers complete already-promised apartments in the coming months.
Tao Wang, chief China economist at Swiss bank UBS, said the long slump in construction activity had not ended, although activity was unlikely to fall. He added, “There is a risk that house prices will fall further and household confidence will suffer further.”
China's state-controlled banking system has shifted its priorities rapidly over the past year. Some loans are provided to real estate developers and home buyers. Loans to industrial firms for industrial construction have instead risen.
Manufacturing investment rose 6.5 percent last year, while real estate growth slowed 9.6 percent, the government said Wednesday.
Much of the increased factory output is sold abroad. China's trade surplus in manufactured goods is about 10 percent of the country's economic output. Exports fell in dollar terms last year as China's currency weakened significantly, although they have started to rise again since November and are likely to rise further. Multinational retailers have started to sell off excess inventory built up at the end of the pandemic and place new orders.
“China's exports will explode to the upside,” said Hayden Briscoe, senior UBS asset management strategist.
Car factories are being built furiously across China. Auto exports rose 58 percent last year, and China overtook Japan to become the world's largest car exporter.
The question now is how to get Chinese households to stop parking so much of their income in bank accounts and start spending again. “Dealing with chronic excess savings may be China's main economic challenge for the next decade,” said Mr. Summers said.
Li Yu Research contributed.
