China's GDP likely to outperform 2023 target of 5% growth: Fitch

Although growth is on a slowing trajectory, it is expected to hold up relatively well at 4.8 per cent in 2024 and 4.7 per cent in 2025. Recent data, however, have indicated weakness. For instance, the manufacturing purchasing managers' index has been below 50 for the past three months, signifying contraction in manufacturing activity, while China's exports fell by 12.4 per cent year-on-year (YoY) in June amid weak global demand prospects.

Despite the GDP growth in the second quarter (Q2) of 2023 being below expectations at 6.3 per cent YoY, following an unexpectedly strong 4.5 per cent expansion in Q1, a full-year growth of 5.6 per cent in 2023 is anticipated as the economy continues to normalise after weak consumption growth in 2022, as per Fitch.

Accommodative policy settings, particularly in fiscal policy, will underpin this growth. The budget deficit is expected to remain stable at 6.5 per cent of GDP on a Fitch-consolidated basis, and the government is expected to lean on infrastructure investment for expansion. However, it's predicted that China's government debt will continue to rise due to increasing spending pressures on local government finances.

The government has signalled a modest monetary easing with a 10-basis-point cut to the medium-term lending facility rate in June, with no further policy rate changes expected this year. On the other hand, further cuts to banks' reserve requirements ratio look probable following a recent dip in credit growth.

The impact of looser credit conditions on short-term activity is still unclear, especially if consumer and business confidence remain subdued. The authorities are expected to avoid a large credit stimulus to prevent adding to systemic financial risk and negatively affecting the sovereign's credit profile.

Lastly, consumption remains pivotal to China's growth. Even though retail sales growth dropped sharply to 3.1 per cent YoY in June 2023 from the nearly two-year record of 18.4 per cent growth in April, it continues to expand month-on-month. Fitch believes falling unemployment should boost consumer confidence and demand in the second half of the year. However, if consumption does not regain momentum in Q3 2023, risks to economic growth forecasts could escalate.

ALCHEMPro News Desk (DP)