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.
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