China: Q4 GDP weak amidst deflation

Key takeaways:

  • Q4 GDP growth was lower than estimates due to ongoing deflation and property market drag.
  • Markets reacted strongly to the weak GDP data with equity indices down to multi-year lows. CNY was unchanged.
  • We believe the worst has been priced in and see value in strategic sectors, where we maintain a constructive long-term outlook.

What happened?

China’s Q4 GDP grew 5.2% YoY. This was slightly below consensus estimates of 5.3% as a prolonged property market crisis and deflationary pressures have weighed on growth momentum. QoQ growth decelerated to 1% vs 1.5% in Q3. However, full year 2023 GDP growth came in at 5.2%, above the government’s 5% target.
The downtrend in home prices has continued to deepen with December prices down -0.4% MoM vs -0.3% in November. On the inflation front, moves in both consumer price index (CPI) and producer price index (PPI) remain deflationary. CPI was -0.3% YoY in December, negative for a third consecutive month, due mainly to lower food and energy prices. Core CPI (excl. food and energy) remained stable at 0.6% YoY in December. PPI has now remained negative for 15 straight months, with a -2.7% YoY fall in December reflecting weak factory gate prices. Separately, retail sales grew 7.4% YoY in December, down on estimates of 8%. Despite the weak domestic data, the PBoC has kept the one-year medium term lending facility rate unchanged at 2.5% and has refrained from rate cuts widely expected by the markets as it tries to control currency depreciation.
On the bright side, infrastructure and industrial investment have increased thanks to policy support. Industrial production growth accelerated to 6.8% YoY in December, compared to analyst expectations of 6.6%. The same is true for fixed asset investment, which grew at a rate of 3.0% YoY from January to December vs consensus expectations of 2.9%.
While the domestic economy continues to remain challenged, global trade is showing early signs of recovery. Exports were a bright spot, growing 2.3% YoY in December on the back of reversal of inventory cycles in sectors including semiconductors and automobiles. A similar trend for December exports was also reported by South Korea and Germany.
China has resumed reporting a youth unemployment rate for 16-24 year olds. This was 14.9% in December vs a record high of 21.3% in June. The overall unemployment rate was 5.1% in December vs 5.0% in November.

How did markets react?

Equity indices fell to multi-year lows today following the weaker-than-expected China GDP data. The Hang Seng Index was down -4%, while the Hang Seng Tech Index was down -6%. China A shares and the Shanghai Composite both declined by -2%, while the Shenzhen Component was down -3%. The CNY remained unchanged against the USD today, with a     -1% YTD drop reflecting rising yield differentials with the U.S.

What does it mean for investors?

China is in the midst of a strategic transformation as it shifts focus from the property sector towards hi-tech manufacturing. To give background to the current GDP report, the production of solar cells, new energy vehicles and power-generating devices grew in 2023 by 54%, 30% and 29% respectively, Investments in hi-tech industries grew 10.3% YoY in 2023.
The government recently announced its plan for a “silver economy” with the aim of catering for an elderly population. The demographic shift towards an aging population in China will likely provide an opportunity for businesses such as care homes, hi-tech product manufacturing for elderly care, healthcare etc. Although details and timelines are not available, the government aims to establish about 10 industrial parks focused on the silver economy.
While fiscal measures are aimed in the right direction to support long-term growth, we expect more monetary policy action to boost consumer sentiment in the immediate term. We expect household consumption and investment in manufacturing and infrastructure to be the key growth drivers of China’s economy in 2024. We forecast China’s GDP growth will be 4.7% in 2024 vs 5.2% in 2023. 
We have a long-term constructive view on strategic sectors in Chinese equites. The MSCI China index is currently trading at a 1 year forward P/E of 8.6x, -25% below its 5-year average with earnings growth expectations of 20% for 2024. We believe that the worst has been priced in and strategic sectors could offer value to investors.

The CIO Memo above is available to download. Please refer to the Important Information at the end of the memo for disclosures and risk warnings.