Good start augurs well for 2023 GDP growth

By He Weiwen

China's GDP growth hit 4.5 percent in the first quarter, the National Bureau of Statistics announced on April 18. The performance was apparently higher than widely expected, and augurs well for the continuous upturn for the whole year of 2023.

The higher-than-expected GDP growth is attributed largely to the fast acceleration in March. On the supply side, the above-scale industrial added value grew by 3.9 percent, 1.5 percentage points higher than the growth of 2.4 percent in February, making the whole quarterly growth rate at 3.0 percent. The service sector performed even stronger, up 5.4 percent, with the lodging and catering industry up 13.6 percent, information services up 11.2 percent and financial services up 6.9 percent.

On the demand side, retail sales gained strong momentum in March, up 10.6 percent year-on-year, three times the growth rate in February, which was 3.5 percent, and thus making the whole quarterly growth rate at 5.8 percent year-on-year.

Final consumption, capital formation and net export, or "three horses driving the economy," showed a steady to robust trend. Among final consumption, retail sales, travel, passenger transportation and recreation rebounded strongly from the low level of the fourth quarter of 2022. Fixed investment growth was less robust, at 5.1 percent, equal to the whole year growth rate of 2022, after a slowdown in March.

The brightest spot is imports and exports. While a widespread worry prevailed after the performance in the first two months was released, there was a strong rebound in March, beating all expectations. Total import and export volume shot up by 32.0 percent over February and up 7.4 percent year-on-year. 

However, the first quarter's GDP performance, undoubtedly exciting, reveals weaknesses in the macro-economic status quo.

First, the industrial production growth rate, even at 3.9 percent in March, is still below the trend line. A fundamental drag is the fall in profits. The first two months of 2023 saw a 22.9-percent industrial profit fall for above-scale industry, covering state-owned enterprises (SOEs), and private and foreign-invested enterprises. It shows the fact that the final demand remains relatively weak.

Second, fixed investment growth remains less stable. At 5.1 percent, it showed no improvement from 2022. Investment in March even fell by 0.25 percent from a month ago. The real estate investment fell by 5.8 percent during the quarter.

Thirdly, the private and foreign-invested enterprises face difficulties in their operations. During the first two months of 2023, total above-scale industrial enterprises saw their profit down 22.9 percent over a year ago. Among them, the SOEs suffered a smaller fall at 17.5 percent, while the private enterprises had a 19.9-percent fall and foreign invested enterprises (including those from Hong Kong, Macao and Taiwan) had a 35.7-percent fall. 

The poor profit situation also passed on to fixed investment performances. During the first quarter, fixed investment saw a 10.0-percent growth in SOEs, but only 0.6-percent growth in the private sector, 3.9-percent increase in foreign enterprises and a fall of 3.4 percent in China's Hong Kong, Macao and Taiwan enterprises. The fixed investment is walking on just one leg, thus relatively weak.

In order to keep the current momentum, we need to make greater efforts to improve the final demand. Governments at different levels need to work hard to enhance the household disposable income and narrow the income gap between the rich and poor. More fiscal and monetary support measures are needed to assist the small and micro businesses.

Deepening reforms, focused on institutional reforms, should be given top priority to let market forces play the fundamental role. Private businesses should be further encouraged and obtain more policy, fiscal and monetary support. The active and good performances of private businesses will, to a large extent, make China's economic rebound and high-quality growth sustainable.

We should adhere to the national policy of opening-up, encouraging more foreign investment in China. More practical work is needed to find out actual needs and difficulties of foreign invested enterprises and help them in their operations in China.

2023 will see a year of low world economic growth, less robust market demand, and probably further geo-economic fragmentation. The world economic outlook remains uncertain. The outlook of China's import and export trade thus faces multiple uncertainties as well, which will weigh on the overall GDP growth for the rest of the year. While focusing on internal circulation to improve the domestic market demand, equal attention should also be paid to stabilize trade relations with our leading partners, to keep and even grow our external markets.

A good start is half the battle. The positive start in 2023 encourages all of us to work harder to maintain strong growth for the whole year, and for a sustainable high-quality growth for the years to come.

He Weiwen is a senior fellow at the Center for China and Globalization.