- China’s economy is expected to fare better than in the previous year and achieve a relatively quick and sharp rebound in activity, despite a somewhat sluggish start in the first quarter.
- The IMF as well as many international investment banks and financial institutions have revised upwards their forecasts for China’s economic growth in 2023.
It is fair to say that the tiger retreated with nothing less than a tumultuous roar, passing the baton on to the rabbit to assume the mantle of the bearer of the new year’s fortunes. Although the tiger’s larger-than-life stature and that of last year’s challenges will no doubt continue to cast a shadow on China’s economy, as we hop further into the Year of the Rabbit, the wheel of fortune is finally turning for the better. Pundits have expressed renewed, albeit cautious, optimism for China’s economic outlook in 2023. With the long-awaited reopening of the country paving the way for recovery, China’s economy is expected to fare better than in the previous year and achieve a relatively quick and sharp rebound in activity, despite a somewhat sluggish start in the first quarter.
Forerunner in world economic recovery in 2021
While, as the title suggests, the benefit of foresight is preferred in this instance, the long perspective of hindsight shows that China’s economy can bounce back strong after adversity, as it had done in 2021 after the pandemic-hit year of 2020. In 2021, China recorded a GDP growth rate of 8.4 per cent – above the expected 8 per cent set by the International Monetary Fund (“IMF”) and World Bank as well as the 6 per cent target laid down by the government. This could be seen as a compelling indicator of its enduring resilience. Even if performance did eventually tail off as the year progressed, China’s economy surged by 18.3 per cent in the first quarter of 2021, which represented the sharpest jump since the country began maintaining quarterly records in 1992. As other major economies were lagging behind, emerging weary and battered from the pandemic, the world’s second-largest economy had actually been on track in leading global economic recovery in 2021.
A challenging year
In the wake of COVID-19 returning with a vengeance and wreaking disruptions of all sorts, China’s economy, however, floundered in 2022 with a GDP growth rate of 3 per cent and a 2.9 per cent growth rate in the fourth quarter, which fell wide of the target of around 5.5 per cent set by Beijing in March 2022 and the 8.1 per cent recorded in 2021. Except in the pandemic-stricken year of 2020, GDP faltered most sharply in 2022 and climbed at its slowest since 1976.
2022 ended on a tentatively hopeful note
Despite the downbeat tone that shaped most of 2022, the year ended on a tentatively encouraging and hopeful note for China’s economy. In December 2022, levels of activity were higher than market expectations, with retail sales contracting by 1.8 per cent year on year (versus the expected minus 9 percent) and the unemployment rate falling slightly to 5.5 per cent (from 5.7 per cent in November 2022). Analysts observe that the end-of-the-year report card lays a promising foundation for economic recovery in 2023 and is an incipient sign of China’s economy gradually on the mend. Consumption and investment are likely to experience a boost in the coming few quarters, as the opening-up gathers pace, and as the Chinese government hits the gas on infrastructure investment, which was buoyed by hefty investment in water resources management in 2022.
Influx of foreign direct investment amid slow growth
Despite the odds stacked against China’s economy in 2022, foreign direct investment (“FDI”) into China remained steady, albeit slow, reaching a rate of 6.3 per cent year on year. Investments from the European Union (“EU”), which had previously slumped during the initial two years of the pandemic, skyrocketed by 92.2 per cent year on year. In particular, investments from Germany rose by 52.9 per cent. Beyond the EU, investments from the United Kingdom and South Korea showed a 40.7 per cent and 64.2 per cent uptick respectively. The steep rise in investments coming from the EU can be partly attributed to several major deals struck by European enterprises, for example, German automobile manufacturer BMW’s acquisition of a majority stake in its Chinese joint venture BMW Brilliance.
While it remains to be seen whether this jump in FDI translates into new opportunities in 2023 for European SMEs that have become more risk-averse in light of the current economic climate, the increase is a promising sign that confidence among overseas investors in China’s economy has not waned as much as feared.
Furthermore, China’s continuous efforts in broadening market access to foreign investors through, for example, expanding its Catalogue of Encouraged Industries for Foreign Investment (“Catalogue”), will go a long way to enhancing its investment appeal. The updated 2022 version of the Catalogue contains a total of 1,474 items – compared to 1,235 items in the 2020 version – and offers new investment opportunities in the central, western and north-eastern regions as well as in industries that are conducive to China’s ascension in global industrial and supply chains, such as green technologies, advanced manufacturing and production-oriented services.
The 8th of January marked a watershed moment for China, as the country reopened its borders to the world, axing its zero-Covid policy at a single stroke and downgrading its management of COVID-19 to a Class B infectious disease. With China slowly awakening from an almost three-year slumber and finally being on the move again, mobility and spending have seen a rise since December 2022; however, they have yet to return to pre-pandemic levels. Testing requirements imposed by many countries on Chinese travellers in response to surging infections will continue to stifle travel appetite in the short term.
The latest data shows China’s re-opening having a positive impact on boosting demand for services, with activity in the services sector growing for the first time in five months. A spike in activity was particularly pronounced during the one-week Lunar New Year holiday. The Caixin/S&P Global services purchasing managers’ index increased to 52.9 in January from 48 in December 2022, putting a stopper on the four-month dry spell of contraction. These results are consistent with the figures released recently that show a comparable rise in China’s official non-manufacturing purchasing managers’ index. The index, which gauges business confidence in the services and construction industries, leapt to 54.4 in January from 41.6 in December – marking the steepest increase since June 2022. Evidenced by an improvement in the above performance indicators, the nascent signs of a robust rebound in economic activity illustrate that China is indeed gradually jettisoning its baggage from a beleaguered year.
Chinese equities recovering lost ground
Spurred on by the abandonment of the zero-Covid policy, Chinese stocks have regained some lost ground since their rock bottom in October 2022. Recently, Goldman Sachs has upgraded its forecast for earnings growth of Chinese stocks from 13 per cent to 17 per cent as well as Chinese equities listed on the Hong Kong Stock Exchange from 28 per cent to 34 per cent. China’s renminbi has rallied hard against the US dollar, gaining 7 per cent from the end of October to mid-January. In the same period, the MSCI China Index jumped sharply by 52 per cent in US dollar terms. Communication services and consumer discretionary sectors have been at the forefront of the rally. The renminbi is projected to make its strongest comeback since 2020, climbing by 3.6 per cent from current levels and closing the year at 6.5 per dollar.
Since the start of 2023, overseas investors have already bagged themselves a full load of Chinese stocks. Foreign purchases of shares listed in Shanghai and Shenzhen via Hong Kong’s Stock Connect Programme, which links China’s mainland markets with the Hong Kong Stock Exchange, have surged to RMB141 billion since the beginning of the new year.
A wealth of foreign exchange reserves
China has the world’s largest foreign exchange reserves, which soared by USD56.8 billion to USD3.184 trillion from December 2022. The climb exceeded the projected USD26 billion rise predicted by economists from a poll conducted by The Wall Street Journal. In the midst of a depreciating dollar, capital influx into the Chinese stock market may have led to an inflationary effect on non-dollar denominated assets in the reserves. Prior to the start of the new year, foreign exchange reserves had already showed an uptick of USD11 billion to USD3.128 trillion in December, compared with USD3.117 trillion in November of last year. According to China’s State Administration of Foreign Exchange, 2023 will see overall stability in foreign exchange reserves, as China’s economy continues on its path to recovery. All in all, it is worth highlighting that China’s plentiful foreign exchange reserves are a good index of its economic stability.
Racking up debt
China’s debt outlook, on the other hand, looks less rosy and is a definite cause for concern. Triggering alarm bells, interest paid on local government debt surpassed RMB1 trillion for the first time in 2022. In addition, interest paid by local governments on bonds reached RMB1.12 trillion in 2022, representing an increase of RMB928 billion from 2021. In the third quarter of last year, China’s debt-to-GDP ratio stood at 273.9 per cent, up 0.8 per cent from the previous quarter. Analysts expect the total worth of issued bonds to reach an all-time peak of RMB7.5 trillion in 2023, the majority of which will be injected into infrastructure projects. In particular, Tianjin, Chongqing, Jiangxi, Sichuan, Hunan, Yunnan and Guangxi could be hard-pressed to meet interest payments this year.
Mitigating default risks remains at the top of the agenda of local authorities, which have promulgated a host of initiatives since 2015 to prevent the debt crisis from boiling over, including debt swaps, fiscal and loan restructuring plans as well as hidden debt pilot programmes.
Drag on exports
All eyes are on China’s much-anticipated economic renewal. Even though high hopes are pinned on the economic powerhouse to turn things around quite swiftly in 2023, it is not yet set in stone. The unrelenting pressure on exports is likely to continue to cloud the outlook, with China’s export numbers taking a nosedive in December of last year, which fell by 9.9 per cent year on year – the most since February 2020. Staging an economic recovery is no easy task given that it is, to some degree, a concerted effort that hinges on the economic health of other global players. With the looming prospect of a global recession stoked by high inflation and interest rates, exports are unlikely to show any real uptick.
The EU’s persistent stagflation – a cocktail of slow economic growth, high unemployment and rising inflation – will continue to exert downward pressure on China’s exports in 2023, with mechanical and electrical manufacturing, and textile industries being hit the hardest. Although shored up by robust trade with Southeast Asian partners and a spike in shipments of new energy vehicles, China’s exports to the EU dropped by 17.5 per cent in December 2022 and those to the US by 19.5 per cent – a harbinger of increasingly feeble world demand. Slackening external demand and an imminent global recession pose the greatest challenges to China’s trade stabilisation. There is a consensus that lifting domestic consumption may very well hold the key to an economic revival.
According to a report by Goldman Sachs, consumption recovery will depend, to a large extent, on the conditions of the labour market, household income and consumer confidence. With the former two factors expected to be on a positive trajectory, the key to reviving consumption seems to lie in restoring consumer confidence, which has been considerably dampened by the fallout of the pandemic. Consumer confidence is, in turn, inextricably tied to property prices, food-price inflation and stock-market performance.
Citi has forecast retail sales to grow by 11 per cent to RMB50 trillion over the course of the year, as footfall continues to pick up. Deep-seated conservative attitudes to consumer spending instilled by the pandemic will take time to dismantle; therefore, China’s economy is unlikely to be jumpstarted by revenge consumption. Having said that, Chinese households are hoarding a massive piggy bank of savings – to the tune of USD2.6 trillion in bank deposits, to be precise. While Chinese consumers do indeed have deep pockets, the hopes of their unleashing the pent-up demand all in one go might be misplaced. It is estimated that only around USD200 billion of the pot of savings will be splashed out this year, dashing the hopes of retailers who long for the return of big Chinese spenders.
A strong impetus is needed to extricate China’s economy from “the vicious circle of weak demand and low expectation of income growth”, according to Zhang Jun, Dean of School of Economics at Fudan University in Shanghai. He adds that, if an export rebound is not the cure, then a robust fiscal package could fit the bill.
The property sector has traditionally been a backbone of China’s economy, accounting for around 28 per cent of its GDP, 40 per cent of bank loans, 50 per cent of government income and 60 per cent of household assets. In recent years, the sector has hit the skids because of the pandemic, with housing sales down more than 20 per cent for six consecutive quarters and property investment plummeting the fastest in November 2022. Consumer confidence seems hard to budge amidst a sagging property market.
What is it exactly that has put Chinese consumers off investment in real estate? Much of Chinese consumers’ wealth is tied up in real estate, and it is common practice for Chinese homebuyers to pay upfront for unfinished housing units. However, as property developers bore the brunt of a liquidity squeeze, they stalled construction, which prompted a crisis of confidence among homebuyers.
On the other hand, there are encouraging signs that the property slump is beginning to shift. Back in November 2022, Beijing launched the most comprehensive set of support measures to prop up the sector. Around RMB1.3 trillion worth of credit is said to have been pumped into the ailing industry, predominantly covering private developers’ public bonds and trust products. Over the last two months, there has been a strong rebound in bonds issued by debt-ridden developers, which is a promising sign that government support is slowly but surely working its magic and offers a ray of optimism after a period of gloom in the sector.
China’s property market seems poised for a modest demand recovery in 2023. In January, mortgage rates were slashed for first-time home buyers in 30 cities, including Huizhou, Zhongshan and Zhuhai in the Greater Bay Area, as part of the government’s push to put people back on the property ladder. The best mortgage rate is currently being offered in Nanning, Zhuhai, Zhuzhou and Changde, standing at 3.7 per cent. Thanks to a series of promotional efforts, government support policies and the incremental release of pent-up demand, sales of new homes leapt by over 20 per cent over the New Year holiday period compared to a year ago.
Shift in policy outlook
On the policy front, the message is loud and clear: stimulating domestic consumption is to take centre stage. Reading the runes offered by Beijing’s leadership at the Central Economic Work Conference held in December 2022, one could glean that, besides banking on the opening-up unleashing a torrent of consumer spending, the government will implement a slew of measures to boost consumption comprehensively in 2023. These include raising the earnings of urban and rural residents and encouraging their spending on elderly care services, housing improvements and new energy vehicles. In addition, the spotlight seems to have shifted on to supporting private enterprises, injecting funding into major projects and encouraging the flow of private capital into such projects. Notwithstanding China’s efforts to shift reliance of its economic fortunes away from the property sector, experts observe that the road ahead is fraught with bumps and turns.
Skies slowly beginning to clear?
Released on 31 January, the IMF’s World Economic Outlook Update sounded a more optimistic note, with its forecast for China’s GDP growth rate this year upgraded to 5.2 per cent. The IMF, however, cautioned that policymakers would need to have a firm grip on the property crisis and the economic fallout caused by pandemic-induced disruptions.
On 8 February, the rating agency Fitch likewise revised upwards its projection for China’s GDP growth rate in 2023 from 4.1 per cent to 5 per cent, citing a faster-than-expected recovery in consumption and activity after the dropping of the zero-Covid policy. As the first Big Three credit rating agency to upgrade its forecast, Fitch, however, qualified the projected economic growth rate by predicting a weaker rebound than that seen in 2021.
As China’s biggest regional economy, Guangdong Province, accounting for around one-tenth of China’s GDP, has set this year’s growth target at “above 5 per cent”. Meanwhile, Shanghai, long been dubbed the country’s financial hub and international gateway, has put forward a slightly more ambitious target of 5.5 per cent, which it is expected to surpass, according to experts in China.
According to Standard Chartered’s Chairman José Viñals, who was speaking at the World Economic Forum in Davos, Switzerland earlier in January, China’s economy would rise from the ashes and be “on fire” in the latter half of 2023, so the rest of the world should brace itself for its dramatic return.
Additionally, the Organisation for Economic Co-operation and Development’s Secretary-General Mathias Cormann has recently commented on China’s reopening as a major, “overwhelmingly positive” contributor to coordinated efforts worldwide to curb soaring inflation. He added that the benefits of reopening would be best reflected in the efficient functioning and normalisation of supply chains over the medium to longer term.
It is perhaps no overstatement that China’s economy faces a rocky path to recovery. Against the macro backdrop of the global economy teetering on the brink of a recession that will certainly not ease the pressure off exports, and a more muted role played by property-driven growth, most of the onus is on domestic consumption to steer China’s economy out of the woods.
Despite the setbacks and challenges, there are cautious grounds for optimism. The IMF as well as many international investment banks and financial institutions have revised upwards their forecasts for China’s economic growth in 2023, which augurs well and suggests that rosy prospects may be closer than it seems. Furthermore, government support policies to beef up the economy are gradually paying dividends. 2023 may be the year marking China’s comeback as one of the world’s economic dynamos, as it taps into the full potential of the abundance, prosperity and longevity symbolised by the rabbit.