Capturing China’s post-pandemic recovery

Ahead of the HSBC 10th Annual China Conference, we share the latest developments in the world’s second largest economy – including its strong macro data, institutional reform and buoyant financial markets.

China’s post-pandemic recovery is firmly underway. There are already signs that the world’s second largest economy is showing signs of renewed strength after removing pandemic restrictions that had been in place for nearly three years.

It is a development of global significance, as a rebound in China will be felt across the rest of Asia and beyond. In this article, we highlight the key economic and financial developments from the first quarter of 2023.

Economic data released in recent months generally points in the right direction. The headline number is first quarter GDP figures, which surprised on the upside with a 4.5% year-on-year growth¹. The macro picture was buoyed by a strong recovery in consumption, especially in the service sector, leading to a more front-loaded recovery.

Chinese consumers are engaged in so-called “revenge spending”. Pent up demand from the pandemic has led to a V-shaped recovery in retail sales, which jumped 10.6% year-on-year in March – the fastest since June 2021².

Shoppers are spending on goods and services such as catering, clothing, cosmetics, and jewellery. This will not be a short-term phenomenon, as it is expected to continue over the coming quarters as some of the excess savings accumulated over the pandemic are spent due to the pickup in consumer confidence.

Away from retail activity, the other data point coming out better than expected relates to trade. Exports rose by 14.8% year-on-year in March, reversing a five-month decline, partly from strong ASEAN demand³. At the same time, the fall in imports also moderated considerably to just 1.4% year-on-year as imports of energy goods increased⁴.

Despite the rosy economic data, China’s outlook still faces uncertainties. The recovery is uneven: investment in property has yet to stabilise, private investment growth is shrinking, and it is unclear whether strong trade data is a short-term development against the backdrop of weakness in global demand. Another issue is pressure from the labour market, due to high levels of youth unemployment.

A number of institutional reforms took place at the National People’s Congress (NPC), which took place in March, with several important changes made to enhance the capacity and efficiency of state governance – especially when it comes to the financial regulation.

Under the new regime, the People’s Bank of China will continue to manage monetary and macro-prudential policies, while spinning off micro-prudential supervision to a newly established National Financial Regulatory Administration. The China Securities Regulatory Commission will take over the National Development and Reform Commission’s functions related to bond issuance.

The change in bond market regulation comes at a time when China’s credit supply data showed a significant rebound, with total social financing growing by 9.9% year on year in February⁵. This stronger than expected increase in aggregate financing is the result of greater bond issuance from both governments and corporates.

International investors are also participating more in China’s onshore bond market, as evidenced by the pickup in trading via the northbound channel of Bond Connect. As of March 2023, there were 791 entities registered to trade onshore bonds on the northbound route⁶. Monthly trading volumes in the same period were RMB 956.2 billion.

The Shanghai Composite rose by 6.1% in the first quarter of 2023. The market will be supported by healthy earnings growth, while efforts to reduce systemic financial risk are also a positive.

From a sectoral perspective, there has been a sharp divergence between two parts of the New Economy. Companies related to renewable energy, such as electric vehicles and solar, were among the worst performing stocks in the first quarter, while technology firms focused on software, media and telecoms have been among the best performers.

The subpar showing of EV and solar stocks is somewhat counterintuitive, as these sectors have stronger fundamentals than technology stocks, but their shares have been under pressure due to concerns about price competition in the automobile industry, as well as overcapacity and trade issues in the solar sector. The rise in technology shares reflects long-term enthusiasm in disruptive innovations like AI-generated content as well as the economic potential of 6G networks and software localisation.

At the HSBC 10th Annual China Conference, which will be held in Shenzhen in May, we will explore all these topics, and more – from the big-picture macro and geopolitical themes to focused discussions on individual sectors, innovative technologies, and financial market trends. Attendees will acquire a comprehensive understanding of the Chinese economic recovery and its future trajectory.

To find out more about the event, please contact your HSBC representative.