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Weak domestic demand now threatens China’s growth potential



A woman and a child walk past workers sorting toys at a shopping mall in Beijing, China, 11 January 2023 (Photo: Reuters/Tingshu Wang).

Author: Yang Yao, PKU

Forecasts for China’s economic growth in 2023 diverge widely. While international organisations and China watchers abroad predict growth of 4 per cent as reasonable, most Chinese economists believe that growth of 5–6 per cent is more likely.

The debate has a lot to do with assumptions about China’s potential growth rate. Many models can be used to estimate the potential growth rate, but the simplest and most credible is the Solow model. Based on this model, a country’s GDP growth rate depends on the growth rates of its stock of net capital, its population size and its total factor productivity.

China’s population has now stalled and its capital growth depends on its national savings. On this count, China has an edge, with national savings accounting for 45 per cent of its GDP. China’s stock of net capital is 3.6 times its GDP and its depreciation rate is 5 per cent. This means that its annual savings translates into 7.5 per cent growth in its net capital stock.

GDP growth brought about by capital accumulation would be half of this, or 3.75 per cent. Previous studies have found that total factor productivity growth contributes 20–40 per cent of GDP growth. Based on this arithmetic, China’s potential growth rate in 2023 is in the range of 4.7–6.3 per cent, justifying Chinese economists’ forecasts.

But China faces several challenges along the way to achieving this potential growth rate in 2023.

The first is how the COVID-19 pandemic will continue to evolve. Chinese authorities lifted the country’s strict zero-COVID policy in early December 2022. Infections quickly peaked in most provinces but the travel and retail sectors bounced back soon after. The uncertainty is whether a second wave of infections will come in the spring and how severe it will be. Considering this uncertainty, we should not expect high rates of growth in the first two quarters of the year.

The Chinese government should make preparations for a second wave of infections. This includes promoting vaccination, increasing ICU capacity and shoring up medical supplies.

The second challenge is declining external demand. The bottleneck to growth of China’s economy is clearly on the demand side — on average, 20–30 per cent of production capacity is idle.

Over the past three years, the Chinese government has relied heavily on investment to boost demand. But the incremental returns on this investment are diminishing. Capital formation has at best contributed 2 percentage points to China’s growth in recent years.

Exports have made a significant contribution to sustaining China’s growth over the same three years. But as recession fears loom large across the global economy, external demand is likely to falter in 2023. China must shift to domestic consumption to generate enough demand to maintain its growth.

This leads to the third and toughest challenge for China’s growth in 2023. Before COVID-19, domestic consumption grew by a respectable 7 per cent most years. The share of GDP attributable to domestic consumption increased from 48 per cent in 2010 to 55 per cent in 2019. But over the past three years, domestic consumption has slowed. For China to reach a potential growth rate of 5.5 per cent in 2023, consumption growth will need to make up at least 3.5 percentage points of this. This would require consumption growth of at least 6.36 per cent, which is by no means an easy task.

Two factors will help boost consumption. One is the recovery of consumer confidence after the pandemic. This may help release the excess savings accumulated by households over the past three years. Judging by the quick recovery of the travel and retail sectors after the first wave of infections, there is reason to believe that consumption will bounce back in 2023.

The other factor is the stabilisation of the property sector. Due to government attempts to prevent overheating, the property sector underwent a large decline in 2022. The Chinese government began to reverse policy in late 2022 and is now encouraging local governments to support the sector. As a result, the property sector should stop its decline in 2023, and that will have a positive impact on consumption.

But those two factors may still not be enough to generate 6.36 per cent growth in domestic consumption. Chinese authorities have put boosting consumption as a top priority for 2023 and may roll out more policies with this as a goal.

Several local governments have issued coupons to help boost consumption. Consumption coupons are equivalent to price discounts and…

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The Latest Updates on China’s Visa-Free Policies



China has fully reopened its borders, allowing international tourism to recover. Visa-free travel policies are reinstated, and visa fees for foreign travelers will be reduced by 25% from December 11, 2023, to December 31, 2024. China and Singapore are also pursuing a 30-day visa-free travel arrangement.

China has fully reopened its borders, promising recovery of international tourism and travel. Many of the visa-free travel policies that were in place prior to the pandemic have therefore come back into effect, enabling people from a wide range of countries to visit

UPDATE (December 8, 2023): On December 8, 2023, the Ministry of Foreign Affairs released the Notice on Temporary Reduction of Fees for Applying Visa to China. According to this notice, during the period from December 11, 2023, to December 31, 2024, China shall cut visa fees by 25 percent across the board for foreign travelers. For more details, please consult with your local Chinese embassy or consulate.

UPDATE (December 7, 2023): China and Singapore are seeking to establish a mutual 30-day visa-free travel arrangement to boost people exchanges between the two countries, according to Reuters. At the time of writing, no further details have been released regarding the timeline or the eligibility, requirement, and application procedures of this new arrangement. Click here for more information regarding this mutual 30-day visa-free travel between China and Singapore. 

This article is republished from China Briefing. Read the rest of the original article.

China Briefing is written and produced by Dezan Shira & Associates. The practice assists foreign investors into China and has done since 1992 through offices in Beijing, Tianjin, Dalian, Qingdao, Shanghai, Hangzhou, Ningbo, Suzhou, Guangzhou, Dongguan, Zhongshan, Shenzhen, and Hong Kong. Please contact the firm for assistance in China at

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Analysis of UK Investments in China for 2023: Evaluating Deals, Values, M&A, and Investments



British Government underwent reshuffle with pro-China David Cameron as Foreign Minister. Possible mild rapprochement with Beijing. Analysis of UK investments in China this year reveals potential trends. Report includes unique Q1-Q3 data and predicts outlook for 2024.

By Chris Devonshire-Ellis & Henry Tillman   

With a reshuffle in the British Government and ex-Prime Minister – and generally pro-China politician David Cameron now as the UK’s Foreign Minister, there have been early signs of a potential mild rapprochement in the British governments overall attitude towards Beijing.

But before people get carried away, we can look at what investments the UK has made into China this year – as investments made while anti-China politics have tended to be the norm are typically indicative of stronger trends. In this report I include unique data that has not previously been made public, and examine the Q1-Q3 investment trends to see what may lie ahead for 2024.

This article is republished from China Briefing. Read the rest of the original article.

China Briefing is written and produced by Dezan Shira & Associates. The practice assists foreign investors into China and has done since 1992 through offices in Beijing, Tianjin, Dalian, Qingdao, Shanghai, Hangzhou, Ningbo, Suzhou, Guangzhou, Dongguan, Zhongshan, Shenzhen, and Hong Kong. Please contact the firm for assistance in China at

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Ratings agency cuts China’s credit outlook



Financially strapped local governments and state-owned enterprises pose a risk to China’s future economic growth, the ratings agency Moody’s said today in a report downgrading the country’s credit outlook from stable to negative.

Growing evidence suggests that the central government will be required to shore up the debt-laden entities, creating “broad downside risks to China’s fiscal, economic and institutional strength,” Moody’s said.

Local governments are thought to have accumulated trillions of dollars of debt due to spending during the COVID pandemic and a loss of income due to a troubled real estate market.

Despite the challenges, Moody’s maintained China’s overall credit rating of A1, which it describes as low-risk though not the safest category of investment. Moody’s said the rating reflects its belief in the country’s “financial and institutional resources to manage the transition in an orderly fashion.”

“Its economy’s vast size and robust, albeit slowing, potential growth rate, support its high shock absorption capacity,” Moody’s said. 

Even so, the outlook downgrade signals some concern about China’s future creditworthiness.

In a statement, China’s Foreign Ministry said it was disappointed in the ratings change and that Moody’s concerns about its growth and financial stability were “unnecessary.” 

In recent years, through the continuous efforts of relevant departments and local governments, China has established a system to prevent and resolve the risks of local government debt,” the ministry said. “The trend of disorderly and illegal borrowing by local governments has been initially curbed, and positive results have been achieved in the disposal of local government debt.”

An employee works at a steel plant in Huaian, in China’s eastern Jiangsu province, Dec. 3, 2023. (AFP)

Moody’s projects China’s annual growth rate will be 4% in 2024 and 2025 but average 3.8% from 2026 to 2030, at which time it might drop again to 3.5%. 

Derek Scissors, the chief economist at China Beige Book, a firm that analyzes China’s economy for investors, said in an email that the downgrade was to be expected.

“It’s a recognition of long-standing conditions, not a new development,” said Scissors, who is also a senior fellow at the free-market think tank American Enterprise Institute in Washington. “I think growth will be faster than Moody’s thinks in 2024 and decelerate more than they think after that.”

Fees from local land sales account for nearly 40% of the revenue to local and regional governments. But China’s real-estate sector has been hit hard by overbuilding. One giant, Evergrande, defaulted under massive debt last year, triggering a broader real estate crisis.

Moody’s report said that “the downsizing of the property sector is a major structural shift in China’s growth drivers which is ongoing and could represent a more significant drag to China’s overall economic growth rate than currently assessed.”

Edited by Tara McKelvey

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