Year of the Rabbit: China’s policy rebalancing

In our view, China’s zero-COVID exit and other policy U-turns in the Year of the Rabbit are tactical moves. Ultimately, the policymakers want to ensure stable gross domestic product (GDP) growth at an average of 4.7 per cent until 2035.

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The package of policy rebalancing includes re-prioritising cyclical growth over structural reforms, supporting domestic demand amid external uncertainty, rebuilding confidence in the private sector and reducing foreign trade tensions.

“After significant suppression in the Year of the Tiger, China’s economy will also usher in a new dawn with the end of the zero-COVID policy.”

Without structural drivers, any benefits from reopening could falter quickly. The government could also withdraw supportive measures if the economy rebounds strongly during the first half of the year.

The sprightly rabbit may be slowed abruptly in the race.

A V-shaped rebound?

The Year of the Rabbit will begin on the 22nd of January this year and end on the 9th of February 2024, spanning a longer-than-usual period of 384 days. According to Chinese tradition, the coming year is also called “Mao”(卯), meaning “fourth” as the rabbit is in the fourth place among the 12 zodiac animals.

The “mao” hour (卯時)or “rabbit” hour (兔時)also refers to 0500 to 0700 hours which ushers in the dawn. After significant suppression in the Year of the Tiger, China’s economy will also usher in a new dawn with the end of the zero-COVID policy.

At the Central Economic Work Conference in December, the government also launched a financial package to support the property sector and pledged to support the platform economy. In addition, they have resumed high-level dialogues with other countries, notably Australia.

Metro traffic in major cities is rebounding

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Recent high frequency data have confirmed a rapid resumption of activity in early January after COVID-19 infections apparently peaked in major cities such as Beijing and Shanghai. Despite the increased burden on the public healthcare system, the authorities have shown strong determination to reopen the economy. A quick rebound in domestic travel and personal consumption will also help lift confidence among households and corporates.

Tactical rebalancing

President Xi Jinping had pledged to grow China into a “medium-developed” country by 2035 which implied a doubling of GDP growth. Robust growth of 8.4 per cent in 2021 helped offset the shortfall in 2020 (2.2 per cent), the first year of the COVID-19 pandemic.

In 2022, China’s zero-COVID policy and property downturn have shaved 1.3 ppt and 1 ppt respectively from GDP growth, according to our estimates. With 2022 likely recording only 2.7 per cent growth, the recent easing is only a tactical rebalancing act within the strategic development framework.

The State Council, to be run by the new cabinet, may announce an official GDP target no lower than 5 per cent for 2023. With the broad-based easing from the property industry to foreign trade policy, the new cabinet will likely enjoy outperformance in the Year of the Rabbit, at least in the first half.

As the government remediates the economic damages caused by over-tightening, we will expect a shifting of balances in the following areas:

Cyclical growth vs structural reforms.

Structural transformations were given very high priority at the expense of short-term economic growth. It seems to us the government now wants to correct this bias. Regulatory tightening of the platform economy and property deleveraging has been disruptive.

Similar to the zero-COVID policy, they represent negative shocks to cyclical growth.

Domestic vs external demand.

As recessionary risks increase globally, China realises the need to revive domestic activity. Of the five economic tasks listed at the Central Economic Working Conference (CEWC) last December, expanding domestic demand was ranked top. This was also included on the agenda by the People’s Bank of China (PBoC) at their Work Meeting on 4 January this year.

Private sector vs the state.

The CEWC called for a thorough implementation of the “two unwavering”. That means while China’s socialism will not only commit to develop the core competitiveness of state-owned economy it will also promote and guide the private sector.

The authorities also called for support for platform companies so they could bolster economic growth, create more jobs and better compete on the global stage. Recent policy documents no longer included expressions that refer to the threat of ‘unorderly expansion of capital(ists)’, indicating a change in attitude.

Foreign trade relations.

As China’s global hub, Hong Kong has begun to dismantle borders with the mainland. President Xi and other government officials have also resumed interactions with foreign dignitaries.

After President Xi’s attendance at The Shanghai Cooperation Organisation Summit in Uzbekistan and G20 in Bali, Foreign Minister Wang Yi received his Australian counterpart Penny Wong in Beijing last December. There are signs that trade tensions will be reduced and the ban on imports of Australian coal will be relaxed. 

Base effects vs real growth

The base effects are also favourable. This year’s Lunar New Year falls in a different month from last year and thus there will be a jump in year-on-year terms. Last January, lockdowns in cities such as Shanghai dented China’s GDP growth to only 0.4 percent year on year or -2.7 percent quarter-on-quarter in the second quarter.

Regional outbreaks likely led to another sequential contraction in the fourth quarter of 2022. Therefore, last year will provide a low base for year-on-year comparison. However, GDP in Q2 this year could jump to at least 7 per cent. For the full 2023 year, we forecast the economy to grow 5.4 per cent.

Base effect helps to lift headline GDP growth

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Raymond Yeung 杨宇霆 is Chief Economist, Greater China and Zhaopeng Xing 邢兆鹏 is Senior China Strategist at ANZ Institutional

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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