China economic outlook, February 2023 has been saved
Cover image by: Jaime Austin
China’s management of COVID-19 saw a dramatic transformation toward the end of 2022. The infrastructure of mass PCR testing and movement tracking through telephone carriers was phased out, and the government encouraged those yet to recover from the infection to return to work. In 2023, China’s borders, which have effectively been closed for nearly three years, also reopened. Without doubt, the government’s decision to bring an end to their policy of zero tolerance toward COVID-19 raises questions over how the economy will perform as a result.
Assuming adequate policy support, we expect real GDP to grow by approximately 5% this year, following a growth of 3% in 2022. We are of the view that Q4 2022 represents a cyclical low in terms of growth.
There are trade-offs when it comes to loosening COVID-19–related restrictions, as was witnessed across the globe over the last two years. As long as Chinese consumers continue to gauge the impact of a flattening curve of infections, economic data could likely stay sluggish, roughly in line with the economic data for November 2022 (as evidenced by purchasing managers’ index, retail sales, and property investment data). As such, 2022 GDP growth slightly undershot our forecast of 3.5%, which was to be expected as it takes time for the general public—especially those who have not contracted COVID-19—to accept the risks associated with the virus. But the impressive speed at which China has achieved herd immunity (Peking University estimated that 900 million citizens had been infected with COVID-19 up until January 11, 20231) means that the worst of COVID-19 is now certainly behind us, and almost all companies saw 100% of their employees return to work by the end of January.
Leading up to the change in the government’s COVID-19 policy, the Chinese economy was already facing several headwinds unrelated to the pandemic, such as a deceleration of the property sector2 and slowing export growth3—in fact, 2023 could be an even more difficult year for China’s external sector than 2022. Nonetheless, financial markets rewarded China’s swift policy decision by staging a major rally of almost all China-related financial instruments, from the Hang Seng index to the RMB exchange rate, within weeks4 (figure 1). Investors’ rationale was simple: Ending the zero-COVID-19 policy has underscored policymakers’ willingness to support economic growth.
At the most recent Central Economic Work Conference, policymakers identified three chief economic challenges: weakening demand, supply chain shocks, and subdued expectations.5
If weakening demand is to be reversed, private investment must be jumpstarted and Chinese consumers need to indulge in revenge consumption. Supply chain stabilization will involve improving the business environment against a geopolitical backdrop fraught with areas of contention. In concrete terms, this will entail outcompeting other investment-led markets such as ASEAN countries and India, who may benefit from investments moving away from China. The good news is that financial investors’ expectations have significantly improved since the second week of November 2022, thanks to the relaxation of COVID-19 restrictions and strengthened policy support to the ailing property sector. Relaxing COVID-19 management controls is not only about demonstrating policymakers’ capacity to weigh the acute trade-off between economic growth and public health, but it is also a powerful move to dispel investor doubts about the priority given to economic development as part of China’s overall policy agenda.
The main risk faced by consumers remains the uncertainties stemming from the property market, not because the sector presents a systemic risk (the Chinese government has the means to prevent such risk), but because consumers might hoard their savings if they do not see substantial upside to holding real estate as a financial asset. Encouraging a rise in homeownership, which effectively means encouraging higher consumer debt, without stoking a housing bubble becomes the key challenge.
The long-term solution to this issue is for local governments to move away from relying on land sales as their main source of revenue. However, such a shift could only be made gradually under the precondition that the municipal bond market is made viable. In the short run, a stable housing market will be necessary. In practice, this means supporting the completion of unfinished projects, providing incentives for healthy developers to increase investment, and consolidating the industry. This is a tall order, but liquidity has returned to offshore USD bond markets within a short period of time on the back of policy support from liquidity injections, debt issuance, and revived equity-listing options.6
Assuming the property market stabilizes, stronger property developers will emerge on the back of further policy support and the PBOC’s accommodative monetary stance. With the Fed heading into the final phase of its tightening campaign, China’s monetary easing certainly faces fewer constraints. This is particularly true as the USD/CNY retreated to 6.8, compared to 7.3 three months ago.
If consumers were to become more confident and embrace revenge consumption, the Chinese government can avoid rolling out a large fiscal stimulus package. However, the biggest hurdle remaining is reviving private investment beyond the property sector. That is why the Central Economic Work Conference prominently emphasized the role of the private sector. Platforms were singled out for their key roles in helping Chinese companies develop and internationalize their operations. We anticipate that concrete measures will be unveiled following such signals, such as the tutoring sector being rehabilitated. The underlying point is that policymakers appear to have a sense of urgency to boost consumption and private investment as external demand could face a more challenging environment in 2023. All in all, we see GDP growth notching around 5% in 2023, with some upside.
Michael Toole, “China's COVID cases may have hit 900 million. What’s headed our way?,” Medical Xpress, January 18, 2023.View in Article
Keith Bradsher, “China is finally trying to fix its housing crisis,” New York Times, November 25, 2022.View in Article
Trading Economics, “China exports YoY,” accessed February 6, 2023.View in Article
Bloomberg, “USD-CNY X-rate,” accessed February 6, 2023.View in Article
PR Newswire, “CGTN: Annual Central Economic Work Conference guides economy through difficult times,” news release, December 24, 2022.View in Article
Based on policy directives from the China Securities Regulatory Commission (CSRC), December 21, 2022.View in Article
Cover image by: Jaime Austin