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Interview: China to see consumption-driven economic rebound in 2023 with modest rise in inflation

Updated: March 1, 2023 Source: Xinhua News Agency
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NEW YORK, Feb. 28 (Xinhua) -- China is expected to experience an economic recovery mostly driven by consumption in 2023 with modest increase in inflation, according to an economist with global investment bank and financial services firm Credit Suisse.

China is, arguably, the only large economy that is actually expected to accelerate this year as it's a pretty consensus view that the advanced economies will likely be decelerating in terms of growth, even if they can avoid recession, said David Wang, chief China economist in an interview with Xinhua on Thursday.

"Mechanically, China will be able to be a part of the contributor of growth and of growth acceleration globally," said Wang, who is also head of Asia economics (ex Japan) with Credit Suisse.

-- Above-trend growth

China will experience a noticeable acceleration in growth or a rebound in growth this year with GDP growth of 5.1 percent in real terms higher from 3 percent in 2022, Wang said.

Wang said the peak growth would happen in the second quarter and China would experience above-trend growth from Q2 to Q4.

Wang expected China's economic growth would then decelerate back to trend growth, which is to be around 4.3 percent to 4.4 percent.

Now, things are normalizing in China in terms of high frequency data on real estate transactions, metro ridership, congestion, flights and box office revenues, according to Wang.

Wang noted that there is no broad-based evidence of revenge for spending and there is still not much visibility as official data for the first two months of 2023 will be released in mid-March.

"We are somewhat skeptical about the narrative that is very popular right now about excessive savings translating into consumption power immediately or in the very near term. I would say the data that we have available to date are consistent with my baseline outlook," said Wang.

Wang said China has done a good job of keeping realized consumer price index (CPI) below the official target of 3 percent thanks to muted pass-through from producer price index (PPI) to CPI and China's optimization of COVID control at a later stage.

Moreover, China has more labor market slack especially among the young and that type of slack in the labor market also mitigates wage pressure, according to Wang.

Wang expected China to have around 2.5 percent of realized CPI in 2023 up from 2 percent in 2022 corresponding to the partial rebound of China's economy.

Wang added, "but due to the factors of lower pass-through and more slack in the labor market, we do not see the type of inflationary pressure in China materializing this year compared to what, say, the west economy experienced last year."

-- Less spillover effects

China's inflation might affect international inflation through passing on cost changes in exported products to foreign importers as well as through its demand for commodities, according to Wang.

"Now, with the advanced economies likely decelerating and advanced economy's consumers shifting away from consumer goods to consumption of services as well, I am calling for a kind of deterioration to China's trade surplus this year," said Wang.

Wang expected China to accumulate a smaller trade surplus this year compared to that of last year.

With weaker external demand and a lot of the exporting contracts still drafted and priced in dollar terms, even if China experiences a pike in the PPI, "China's ability to really pass on that inflationary pressure to their recipients or to the importers of Chinese goods might be limited," said Wang.

"The bargaining power might not be there because you have weaker demand in the first place," said Wang.

Wang added "If China actually increases its demand for commodities and that might drive up the spot prices and futures prices for these commodities…you can't really say that China (is) directly imposing inflation on the rest of the world. You can say everyone is buying the same commodity and China is not the only buyer of these commodities."

Wang said the amount of additional demand coming from China beyond just what's already kind of baked in the removal of the COVID disruption remains to be seen.

This time around, real estate and infrastructure will not be the key driver of rebound to China recovery this year and that means China's additional demand for major commodities this year might be limited or underwhelming, said Wang.

"We think that the main driver will be consumption and specifically consumption of services. This of course followed by a partial rebound on the investment side as well," Wang said.

So the immediate implication here is that there will be modestly less or essentially less spillover effect compared to the previous rebounds of similar magnitude in terms of overall GDP growth, Wang said.

Editor: Gao Jingyan, Jiang Feifan