After a rocky start to 2023，China's economy bounced back in the third quarter. In this article，we review the ups and downs of the first three quarters of 2023 and give an economic outlook for the rest of the year through 2024.

The Chinese economy had a tough first half in 2023，but we believe the primary problems came more from fluctuations in the supply side rather than falling demand. Specifically，the way companies managed their inventories made the state of the economy seem worse off than it actually was.

The Chinese economy was anticipated to rebound strongly in 2023，following the announcement of COVID-19 control policy adjustments in December 2022. This optimism prompted businesses to increase inventories at the beginning of the year. The official Purchasing Managers' Index (PMI) for February 2023 revealed that both factory output and new orders had entered expansionary territory. However，production had outpaced new orders，suggesting a swifter recovery in supply compared to demand.

However，as external shocks hit the economy in the second quarter，the economic picture became increasingly uncertain. With demand falling short of expectations and considering the increase in inventories from the previous quarter，the excess supply put downward pressure on prices，prompting businesses to swiftly reduce their inventories. Consequently，production in both industrial and service sectors declined year over year in April and May. Importantly，this decision to withdraw supply magnified the negative outlook for economic performance. As final demand weakened，it led to progressively larger fluctuations in demand at the supplier level further upstream，a phenomenon known as the Bullwhip Effect. This coupled with deflationary pressures，heightened the perception of weaker demand，depressing consumer sentiment and impacting the capital market.