Chinese retail sales growth slowed from 18.4% year-on-year in April to 12.7% in May. While these numbers appear strong, they reflect a favourable base effect due to the Shanghai lockdown in 2022. Looking at the data in year-on-year terms can be misleading. Corrected for seasonal effects, retail sales rose 0.2% and 0.4% month-on-month in April and May.
While recent data have been softening, month-on-month retail sales have averaged 0.63% so far in 2023, in line with the 2018 average of 0.65%. In 2018, GDP growth in China was 6.7%. This emphasises a key point. Though data in recent months have slowed, the recovery in China year-to-date appears to be consistent with the 5% GDP growth target.
What will worry Beijing is that consumer confidence remains weak. Deposits held by Chinese households grew by USD 2.6 trillion in 2022, the largest rise on record and equivalent to around 14% of China’s GDP. President Xi would have hoped that this translated into stronger household spending in 2023, but low consumer confidence remains a constraint on this.
Structural challenges
The deleveraging of the real estate sector represents one of the most prominent challenges to GDP growth in 2023 for China. The Government Work Report in March highlighted the intention to prevent unregulated expansion of the sector. In line with this, the quota for special local government bonds was set at RMB 3.8 trillion in 2023, below the RMB 4.2 trillion actual issuance in 2022.
Despite this, residential real estate is tentatively recovering in 2023, with new house prices turning positive in year-on-year terms in May and residential sales having done so in February. Given real estate accounts for around 70% of household wealth in China, this could have positive implications for consumer spending via the wealth effect.
China maintained a low unemployment rate during the pandemic, despite its zero-Covid policy dampening economic activity. The overall urban unemployment rate remained between 4.9% and 6.2% from 2019 to 2022 and was 5.2% in May 2023. For those aged 16-24, the labour market is currently more challenging. Youth unemployment rose to a record high in May of 20.8%. Despite an announcement in March that state-owned enterprises would create 1 million internships for graduates, the fact that 11.6 million students will graduate in
2023 means youth unemployment is likely to continue to rise.
While this is a structural issue that will require attention from Beijing, the largest constraint on future GDP growth appears to be China’s shrinking population. According to projections from the United Nations, China’s population will be around 46% smaller than it is today by 2100. This compares to an estimated 9% increase in the population of India, for example.
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