China's economic and industry outlook for 2023
China’s management of Covid-19 has seen a dramatic transformation over the last month of 2022. On the latest developments, according to China's National Health Commission on December 26, all restrictive measures including quarantines and home observations for international travels will be scrapped since Jan 8, 2023. China's borders, which have effectively been closed for nearly three years, will therefore reopen in 2023. The infrastructure of mass PCR testing and movement tracking through telephone carriers were phased out. Even those who have not fully recovered from the virus are being encouraged to go back to work this week. In light of these changes, assuming adequate policy support, we see our 2023 GDP growth forecast of 4.5%, previously viewed as optimistic, as very much feasible. Of course, the decision taken by the government to bring an end to the zero-Covid policy has raised a few questions as well, however. Firstly, why now? Second, is China ready for such an abrupt exit in the midst of the winter flu season and while the roadmap remains unclear? And finally, will the economy be staging a strong rebound led by revenge consumption?To get more news about
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Let us address the questions above one by one. It is easy to say that more preparations ought to have been made before such a major relaxation to the policy in early December. But the reality is that such decisions are often taken due to various pressures. By Q4, the economy was already facing several headwinds such as a deceleration of the property sector and slowing export growth (2023 could be a more difficult year for China's external sector). Society had also begun to exhibit increasing fatigue over the zero-Covid policy, and even more so towards its over-zealous execution such as rampant lockdowns in many cities despite the central government's ‘20 measures’ around optimizing Covid management. As the saying goes, the rest is history. In hindsight, more efforts could have been made to roll out booster vaccines among the elderly and one could argue that the government should have procured cold medicines and then distributed them to all households. Nonetheless, financial markets have rewarded China's swift decision by staging a major rally of almost all China-related financial instruments from the Hang Seng Index to the RMB exchange rate within weeks. Investors' rationale was simple – ending the zero-Covid policy has underscored the ability of policymakers in their cost-benefit analysis. Meanwhile, in many major cities, most people have decided to stay home as the virus rips through the country. According to a survey through Weibo which garnered nearly 5,000 responses, more than 60% of people in Hebei, Beijing, Hubei, Sichuan and Liaoning have been infected.
Various models have projected number of Covid-induced fatalities, ranging from 0.05% to 0.1% of total population. Such predictions have been made based on what transpired in Hong Kong earlier this year. But much of fatalities could have been avoided should vaccination rate among the old be raised. But Hong Kong's experience in dealing with Covid since March this year suggests that vaccine mandates caused the curve to flatten quickly. The challenge for China, however, is that medical facilities in smaller cities and in the countryside are inadequate (the number of hospital beds per 1,000 people in rural areas across most provinces is only around five), while the Chinese New Year holiday presents an additional test as millions of migrant workers will return home for the first time in three years. On the economy, assuming that consumers are carefully gauging the impact of a flattening curve over the next few weeks, December data will likely stay sluggish, similar to what we have seen in November (as evidenced by PMI, retail sales and property investment data). As such, 2022 GDP growth might slightly undershoot our forecast of 3.5%. This is to be expected as it takes time for the general public – especially those who have not contacted Covid – to accept the notion that the virus is no more deadly than seasonal flu.
From the standpoint of policymakers, illusive revenge consumption is not the only risk. At the most recent Central Economic Work Conference, three chief economic difficulties were identified: weakening demand, supply chain shocks and subdued expectations. If weakening demand is reversed, private investment must be jump started while revenge consumption is needed. Supply chain stabilization is about improving the business environment against a geopolitical backdrop fraught with areas of contention. In concrete terms, this is about out-competing other investment-led markets such as the ASEAN region and India who may benefit from investment moving away from China. The good news is that financial investors' expectations have significantly improved since the second week of November thanks to the relaxation of Covid restrictions and stepped-up policy support to the ailing property sector. Relaxing Covid management controls is not only about demonstrating policymakers' capacity to weigh up the acute trade-off between economic growth and public health, but it is also a powerful move to dispel investor doubts about the priority of economic development as part of China's overall policy agenda.
