China’s Economic Outlook

The end of Covid restrictions is helping to drive an economic recovery in the Chinese Mainland as life gets back to normal for consumers and businesses alike. KPMG China’s economists have forecast 5.7% GDP growth for 2023. This is a bit higher than the official government forecast of “around 5%”, but has been supported by the higher-than-expected results for Q1 released in April. However, the Chinese economy is likely to face challenges in the year ahead, which could constrain the pace of its economic recovery. 

The recent GDP growth is largely as a result of a strong rebound in domestic consumption, as consumer confidence has returned after three years of pandemic-related restrictions. Exports have also been a key driver of growth recently, including a 14.8% rise in March, which contributed to the strong Q1 figures. 

One explanation for the resilience in exports has been a shift in China’s export structure. This has meant more exports to markets including ASEAN and the Middle East where economic performance has been more positive, and less reliance on economies like the US and EU. However, it is likely that exports will slow down in the second half of 2023 as the cooler global economic environment will have an impact.

Another headwind could be the Chinese real estate market, which has improved from the low base of 2022 but the momentum has weakened a bit in recent months. If it remains weak, this could become an issue, as the real estate market contributes significantly to China’s overall GDP growth. In addition, external challenges could weigh on the global economy this year, including geopolitical tensions such as the ongoing conflict in Ukraine.

Hong Kong has also rebounded after the border reopening, and KPMG has forecast economic growth for the city of 2.7% in 2023. Like the Chinese Mainland, the city has benefited from the end of Covid restrictions, which is evidenced by the tourism sector. Although the numbers have not yet returned to pre-pandemic levels, arrivals have recovered sharply and the upward trend seems set to continue.

Monthly tourist arrivals to Hong Kong, 3-month moving average, thousand people

Hong Kong’s economic prospects are also tied to its role as a key financial centre for the Mainland. As Hong Kong is an important investment and trade conduit for business going in and out of China, it will benefit from the economic recovery in the Mainland in the year ahead.

The Central Government has made clear that it will continue to support Hong Kong’s role as an international financial centre as well as a financial hub for the nation. This commitment was reiterated in the report of the 20th National Congress of the Communist Party of China in October last year. 

In practical terms, evidence of this support for Hong Kong’s financial sector can be seen in the continuing enhancements to the cross-border investment schemes. In May this year, the interest rate Swap Connect scheme was launched, adding to the Stock, Bond and Wealth Management Connect schemes that have been launched since 2014 to deepen the connections between the Mainland and Hong Kong financial markets.  

An important part of Hong Kong’s role as the financial hub for the nation is in RMB internationalisation. Hong Kong is the world's largest offshore RMB business hub, accounting for 73% of RMB international payment transactions. As the RMB is expected to play a bigger role in China’s trade and finance in the future, this will provide further opportunities for the development and growth of Hong Kong’s financial sector. 

There has been significant growth in the use of the RMB in recent years, especially in global trade. According to the Standard Chartered Renminbi Globalisation Index, international use of the RMB grew by 26% during 2022(1). This trend seems likely to continue. For example, in February, central banks in China and Brazil signed a memorandum to establish RMB clearing mechanism in Brazil, which should boost the usage of RMB in cross-border transactions between the two countries. As China is the largest exporter globally, it is aiming to leverage this leading position to encourage more trade settlement in RMB terms. 

On the financial investment side of RMB internationalisation, however, growth has been fairly static recently after an initial strong period of growth around 10 years ago. From a Hong Kong perspective, the banking sector would like to see greater use of the RMB in fundraising, lending and investment. Hong Kong has the infrastructure and professional expertise in place, as it already provides these services for the Hong Kong dollar and a range of global currencies. 

However, it is worth noting that currently the top priority of the Central Government is to balance economic growth with enhancing national security. The banking sector in Hong Kong would welcome more clarity and a roadmap on the development of RMB internationalisation in financial services, which would also give global investors more confidence about investing in Hong Kong. 

Looking forward, there are plenty of reasons to be confident about the continued improvement in the Chinese Mainland and Hong Kong economies. It is probably too early to be overly optimistic given that both economies are still recovering from the pandemic and will face external economic challenges in the year ahead. But Hong Kong’s returning tourists and other rebounding sectors will boost the local economy and drive confidence, while the city’s unique role in China’s financial system will support the city’s recovery throughout 2023 and beyond. 

Gary Cai 
Chief Strategy Officer
KPMG China
+86 (21) 2212 3687
gary.cai@kpmg.com