OECD Ups China’s 2023 GDP Forecast But Risks Persist

THE OECD HAS raised its forecast for China’s GDP growth this year to 5.3%, seven-tenths of a percentage point higher than its forecast last November.

However, its latest Economic Outlook sees growth slowing next year to 4.9% as the surge in economic activity from abandoning the zero-Covid policy moderates.

China’s lag in easing its anti-COVID restrictions compared to other countries is why it will have faster growth in 2023 than in 2022 when the overwhelming majority of G20 economies will experience the reverse as they got their re-opening boosts last year.

Signs of the impact of full reopening in China were seen in January and February’s purchasing managers’ surveys, with substantially more firms reporting rising output than falling output. Retail sales for the two months rose by 3.5% year-on-year.

The OECD expects household savings built up during the zero-Covid-policy period to be spent in 2023, especially on in-person services, boosting aggregate domestic demand. With inflation relatively subdued, policymakers also have the scope to keep monetary policy loose to help support consumption.

At the same time, the OECD expects stronger commodity demand from China, which accounts for a large share of consumption in many markets, to put upward pressure on commodity prices, especially if Chinese energy demand strengthens significantly after stagnating in 2022.

However, a resumption of international travel by Chinese residents will further boost global air traffic and services trade, with the strongest gains likely in neighbouring Asian economies based on visitor patterns before the pandemic.

The official growth forecast for this year is 5%. Downside risks are still significant — US-China tensions are high and concerns about global financial vulnerabilities are rising.

The real estate slump still casts a long shadow over the economy. Property investment is stabilising but not turning around, falling by 5.7% year-on-year in January-February, although that represents an improvement on December’s 12.2% decline. 

Youth unemployment, which rose to 18.1% in January-February from 16.7% in December, is another persisting concern.

State-led investment grew by 10.5% year-on-year in January-February, far outpacing private investment growth of 0.8% year-on-year. New premier Li Qiang’s words of support for the private sector during the Two Sessions reflect the need for authorities to encourage the country’s discouraged entrepreneurs.

Otherwise expansionary policy-fuelled growth in the short term will fizzle out in the medium term.

China Revamps Tech, Financial And Data Governance

THE NATIONAL PEOPLE’S CONGRESS will rubber-stamp sweeping reforms to China’s governance in the coming days.

New institutions will oversee the financial and technology sectors, which multiple state organisations currently regulate.

Most notably for this Bystander, a new Party central work commission for the technology sector will oversee the restructuring of the science and technology ministry, which is intended to channel more resources to achieving breakthroughs.

President Xi Jinping is likely to chair the new commission as the intent of the governance reform is to move faster toward self-reliance in the face of what the State Council said were “the severe situation of international scientific and technological competition as well as external containment and suppression”.

Hitherto, the development of an indigenous semiconductor industry, for example, has underwhelmed. However, putting tech development under high-level Party leadership that will impose top-down policymaking will be no guarantee of more successful outcomes, even if policy implementation is less bedevilled by bureaucratic in-fighting and more responsive to the top leadership’s direction.

A new national financial regulatory administration will replace the existing banking and insurance watchdogs and bring supervision of the industry, apart from the securities sector, into a body directly under the State Council. Some powers will be removed from the People’s Bank of China. Details are yet to be made public. The securities regulator will also be directly overseen by the State Council.

The Party’s central financial work commission will likely be revived to enable Party direction of the new financial regulatory architecture which appears to be separating macroprudential regulation from market supervision. The new premier would likely chair the work commission.

Data is the third area of sweeping governance reform. A new national data bureau will be responsible for coordinating the sharing and development of data resources and planning the digital economy. The country’s top state-planning agency, the National Development and Reform Commission, will oversee it.

New central party committees overseeing ministries have been a hallmark of Xi’s governance. Yet, the latest reforms are the most sweeping since the creation of the National Supervisory Commission in 2018 to oversee anti-corruption work.

They reflect what top leadership considers China’s priorities: scientific and technological self-reliance and development, reducing systemic risk in the financial system and tighter control over data collection by private companies and cross-border data transfers.

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IMF Sees Covid Opening Bump To China’s GDP, Frets Over Property

THE INTERNATIONAL MONETARY FUND has teased its forecast for China’s growth this year to 5.2%, 0.8 of a percentage point higher than its forecast last October.

The latest update to its World Economic Outlook attributes the upward GDP revision to Beijing ending its zero-Covid policy last November.

For 2024, the Fund expects China’s economic recovery to moderate to 4.5%, unchanged from its October forecast. After that, it expects growth to settle below 4% over the medium term amid declining business dynamism and slow progress on structural reforms.

Overall, the Fund expects global growth to fall from an estimated 3.4% in 2022 to 2.9% in 2023 but then rise to 3.1% in 2024, with central banks’ suppression of inflation and Russia’s war in Ukraine continuing to weigh on economic activity.

What the Fund calls’ severe health outcomes in China’ is one of the downside risks to the global economy it identifies, along with persistent inflation (a risk exacerbated if China’s economy grows faster than expected), an escalation of the war in Ukraine and worsening debt distress.

Amid still-low population immunity levels and insufficient hospital capacity, especially outside the major urban areas, significant health consequences could hamper the recovery.

The IMF says accelerating Covid-19 vaccinations in China would ‘safeguard’ the global recovery.

It again highlights the continuing weakness in property investment in China, warning that a deepening crisis in the real estate market remains ‘a major source of vulnerability’, with risks of widespread defaults by developers and resulting financial sector instability.

Developer restructuring is proceeding slowly, amid the lingering property market crisis. Developers have yet to deliver on a large backlog of presold housing, and downward pressure is building on house prices (so far limited by home price floors).

Reopening the economy should boost consumer and business sentiment and release pent-up demand, which had remained subdued coming out of 2022. At 3.0%, last year was the first time in more than 40 years that China’s economy grew below the global average.

China’s 2022 GDP Shows Impact Of Zero-Covid

TO NO ONE’S particular surprise, the Covid-19 pandemic weighed heavily on China’s economy in 2022. GDP growth for the year was 3.0%, the National Statistics Bureau reported.

That was slightly better than the consensus forecast of private economists — no doubt every drop of output that could be found in the fourth quarter was found, perhaps more — but far short of the official goal of 5.5% growth for the year.

Except for the first year of the pandemic, one has to go back to 1976 — the year Mao died — to find a year in which the economy grew more slowly.

It was not only the pandemic that held back the economy. The property market remained deeply troubled, and the war in Ukraine roiled the global economy, pushing up commodity import prices for China and weakening demand for its exports.

Covid-19 will likely continue to weigh on the economy in 2023, even as the unexpectedly sudden dropping of the zero-Covid policy allows it to reopen because of the risk of new surges of infection among a still under-vaccinated population.

Last week, Kristalina Georgieva, managing director of the International Monetary Fund, urged Beijing to continue reopening its economy, suggesting that if it does, China will return to contributing to global growth by around the middle of the year.

In October, the Fund forecasted that China’s economy would grow by 3.2% in 2022 and 4.4% this year. Earlier this month, the World Bank forecast 4.3% GDP growth for this year as the lifting of pandemic restrictions released pent-up consumer spending. (Its estimate for 2022, at 2.7%, undershot slightly.

December’s better-than-expected retail sales figures, also newly released, support for the World Bank’s view. Though still lower than a year earlier, they were down by only 1.8%, compared to November’s year-on-year drop of 5.9%. 

Getting private investment going again will also be critical to this year’s outcome, one reason that senior leaders have been talking up the importance and prospects of private businesses in recent days and signalling that the tech crackdown is over for now.

Private investment grew by just 0.9% in 2022, compared with 8.7% and 4.7% in the two years before the pandemic started; state investment grew by 10.1% last year, compared to 1.9% and 6.8% in 2018 and 2019. 

The level of social financing, a proxy for total debt, rose to 286% of GDP at year’s end, a reminder of the constraints on public spending to stimulate the economy, and that there is still plenty of work on deleveraging to be done.

Beijing will also have to deal with the economic impacts of its ageing and now contracting population. China’s population started shrinking in 2022 for the first time in six decades, the National Statistics Bureau reported today.

The decline in the fertility rate that has been evident since 2016 was the main reason, but the mortality rate also increased. The lifting of zero-Covid will likely bring more pandemic-related deaths in 2023.

The National Statistics Bureau data show that 62% of the population was of working age (16-59 years old), down from around 70% a decade ago, underlining the country’s economic challenges from its demographic shift. China could well lose its race to get rich before it gets old.

China Formalises State Guidance Of Its Tech Platforms

AN INVESTMENT FUND set up by the Cyberspace Administration has acquired a stake and a seat on the board of an Alibaba subsidiary to control the content of one of China’s leading video streaming services, Youku.

The ‘rectification‘ of the tech sector is being completed — or at least having a line drawn under the current phase — by government agencies acquiring golden shares in many of the country’s major domestic internet platforms.

The ‘special management’ shares confer a 1% stake and special powers over a company’s operations. The aim, as in the case of Youku, is to control the content hosted on the platforms and the data they create more tightly.

A government entity yet to be decided will reportedly take a stake in the video business of Tencent, the gaming and social media conglomerate. ByteDance, which owns TikTok, and Weibo reportedly already have such an arrangement.

The policy appears to have been quietly pursued for some time in less prominent companies and subsidiaries of the major platforms. The special management shares formalise for the tech platform giants the ultimate and arbitrary power that authorities already hold over businesses in China.

Doing so will allow for it to be exercised more routinely and precisely, removing the need for the heavy-handed and disruptive measures taken during the crack-down on tech over the past couple of years to rein in the tech platforms’ power.

It also cements the intention of aligning the tech companies with Party and state policy, and delegates implementation to the appropriate agency.

Since 2017, the Party has pursued closer guidance of entrepreneurs and made clear its expectation that entrepreneurs will be ‘patriotic’. The tardiness of the sector in responding led to the use of the stick in preference to the carrot over the past two years.

Tech company resources will henceforth be more diligent in redirecting resources to upgrading the ‘real economy’ and other policy goals such as preventing private monopolies, improving conditions for gig workers and regulating fintech.

There is nothing particularly novel in the concept of the Party or state being in the vanguard of the organisation of economic activity.

In traditional industry, state-owned enterprises played the industrial policy steering role. The tech sector never had those, allowing private companies to flourish in their absence.

That vacuum has now been filled, and government agencies will set about the competitive business of building the next generation of national champions.

Gloomy World Bank Sees Slower China Economic Recovery

IN A DOWNBEAT outlook for the global economy, the World Bank had again cut its growth forecasts for China, but still sees a ‘bounce-back’ recovery this year.

The Bank estimates in its latest Global Economic Prospects that China’s economy expanded by 2.7% last year, 1.9% less than it had forecast in June.

Its forecast for this year is an acceleration to 4.3% GDP growth as the lifting of pandemic restrictions releases pent-up consumer spending.

That number is 0.9% less than the Bank’s June prediction, attributed to longer-than-expected pandemic-related disruptions, weaker external demand and protracted weakness in the real estate sector.

The recent shift toward reopening has been faster than expected, and there is significant uncertainty about the trajectory of the pandemic and how households, businesses, and policymakers in China will respond. The economic recovery may be delayed if reopening results in major outbreaks that overburden the health sector and sap confidence.

In 2024, the Bank expects further recovery to 5.0% growth, 0.1% shy of its previous forecast.

However, the Bank warns, China’s economy remains vulnerable to prolonged drag from the real estate sector, continued pandemic-related disruptions, and extreme weather events.

A slowdown in China would add further risks to already fragile global activity, with the impact being felt in global trade and commodity and financial markets. The direct trade spillovers would be most significant for China’s regional neighbours, especially those integrated into China’s supply chains, but trade-reliant developed economies would also feel the headwinds.

China Restores Growth As Its Priority

THE FIRST ANNUAL Central Economic Work Conference since October’s Part Congress and the zero-Covid policy was rolled back following street protests earlier this month was held in Beijing at the end of last week.

It also followed the publication of the high-frequency economic data for November that underlined how weak economic activity had become, from retail sales to exports. Both the manufacturing and non-manufacturing purchasing managers’ index were in contractionary territory.

The data, as much as the protests of frustration against strict lockdowns, may have driven the first steps in relaxing zero-Covid to alleviate the economic impact that it was having.

The OECD forecasts GDP growth of 3.3% this year, although some private economists believe the figure will fall below 3.0%. Waves of infections following the easing of zero-Covid are likely to mean the economy will start 2023 on the back foot.

However, the announcement following the work conference confirms that the leadership’s priority has switched from disease elimination to economic revival.

Relatively low inflation provides headroom for further monetary loosening. However, the meeting indicated that policymakers are more likely to turn to fiscal stimulus, with the twin objectives of stimulating domestic consumption and avoiding another round of property sector-related debt.

China Sets Up Cautious Zero-Covid Course Correction

IT HAS BEEN an eventful and direction-changing ten days in China, starting with the widespread protests last weekend against the zero-Covid policy, the most significant expression of public dissent since the events in Tiananmen Square in 1989.

Then came the announcement of the death of former Premier Jiang Zemin. There was a certain symbolic symmetry to be spotted by those looking for such things as it was Jiang who took over as China’s leader in the aftermath of the suppression of the Tiananmen protest and then oversaw two decades of double-didgit economic growth and opening to the outside world.

However, the death allowed for the reassertion of solemnity and control.

As the week ended, Vice-Premier Sun Chunlan, the Politburo member responsible for implementing President Xi Jinping’s signature zero-Covid policy, gave hints of further relaxations of the approach to come. These will be partly in response to the street protests and partially because the draconian restrictions of zero-Covid have failed to contain the virus’s spread this year while the economic costs are mounting.

Changes will be framed as improvement of current policies or adaptation to new circumstances; state media has already started to soften the official line on the deadliness of the threat of the virus. Officials lifted lockdowns in dozens of districts in big cities like Shanghai and Guangzhou in the second half of the week.

This is not the end of zero-Covid, at least not yet. That will require mass vaccination of the elderly (now being prioritised), higher booster vaccination rates among the broader population and a greater capacity within the hospital system to treat severe cases, which will take months at least. 

Lifting restrictions too early would result in deaths running, it has been estimated, into the hundreds of thousands. That would be politically unacceptable, especially given that the narrative over the past three years about China’s approach has saved lives compared with the recklessness of the West in accepting ‘living with Covid’.

Yet Beijing is now contemplating doing the same for one of the same reasons as the West, the economic cost of shutting down daily and business life.

Combined with the global headwinds buffeting the economy, which are likely to stiffen as the world economy heads towards recession, a still deeply troubled real estate sector and continuing tensions with the United States, this will keep China’s GDP growth below potential for the foreseeable future. 

The OECD is forecasting 3.3% growth this year, and 4.6% next, which may be optimistic, although the indications from Beijing are that there will be more attention paid to growth from now on, so more fiscal and monetary support is likely.

The forthcoming Politburo meeting is expected to confirm that, although details will likely not be known until the subsequent Central Economic Work Conference mid-month.

OECD Sees Trend Decline For China’s Growth Beyond Headwinds

THE OECD SEES China’s economy growing by 3.3% this year, a slight uptick from its 3.2% forecast in September. However, it has trimmed its forecast for 2023 to 4.6% from 4.7% in the face of a global economy expected to slow to 2.2% growth next year from 3.1% this.

Globally, tighter monetary policy, higher real interest rates, persistently high energy prices, weak real household income growth and declining confidence are all expected to sap growth, the OECD says in its latest Economic Outlook.

Those headwinds are buffeting China, but the OECD underlines how, additionally, the persistance of the omicron variant has caused recurring waves of lockdowns in 2022, disrupting economic activity.

Growth is being held up by infrastructure investment and efforts to bail out the property sector, including more stringent implementation of credit quotas for presold housing and a lower lending rate for first homebuyers.

Monetary policy has generally become more supportive with a series of interest rate and reserve requirement rate cuts. 

Against that, a rise in precautionary household savings, spurred by low consumer confidence coupled with inadequate social protection, is holding back a rebalancing of demand towards consumption. 

However, despite recent fresh food price rises, the OECD expects headline consumer price inflation to remain benign due to measures to manage energy and food prices: 

• Replacing part of China’s crude oil imports with discounted Urals oil from Russia is helping to contain inflationary pressure, and LNG reserves are being refilled from Russian sources. 
• China’s large grain reserves and export restrictions in the form of quotas will continue to mitigate the impact of rising global grain prices on domestic inflation and reduce the risk of shortages. 

Lockdown-induced supply-side constraints on fresh food are the more significant inflationary concern.

The OECD also expects fiscal policy to become more supportive through cuts and deferrals of taxes and charges and spending of reserve funds. It says that a wide range of additional policies is being implemented, including ones outside the public budget. Overall, the measures are worth 1-2% of GDP.

Export growth will also likely stay low amid weaker global growth before picking up in 2024. 

Over that time horizon, the OECD expects GDP growth to gradually move back to its underlying pace, which is slowing. It is forecasting 4.1% growth in 2024. Meanwhile, infrastructure investment will pick up, partly offsetting weaker real estate investment. 

However, the OECD warns:

Continued defaults and disorderly deleveraging in the overstretched property sector may trigger failures of smaller banks and shadow banking institutions. By contrast, relaxing prudential measures and encouraging investment in real estate may fuel the bubble and cause more significant disruptions further down the road.

A further rise in corporate defaults will improve risk pricing but may adversely affect banks, trust companies, and other private and institutional investors. 

The key downside risk remains Covid-19. Vaccination rates have picked up, but they remain low among the elderly, especially those over 80. Booster jabs also seem to have plateaued. Further, the effectiveness of Chinese vaccines is less than that of Western ones. 

That makes lifting the zero-Covid policy nigh impossible in the near term, regardless of its economic cost. The recent outbreaks have foiled attempts to administer it more flexibly.

Like the IMF, the OECD calls for structural reforms to strengthen the social safety net, which would help to reduce precautionary savings and rebalance demand from investment to consumption. It suggests that pension and unemployment insurance coverage should be extended to all and health insurance coverage widened.

It also suggests a series of reforms that would strengthen the private sector and lessen the dominance of state-owned enterprises, although that is not the tenor of the new era.

How Private Chinese Companies Can Signal Party Fealty

CHINA HAS A unique model of corporate governance. It is one in which the ruling party has formal standing not only in state-owned enterprises (SOEs), as is to be expected, but also in privately owned companies.

Formalising and strengthening that standing has been an official policy since 2015. Research by Lauren Yu-Hsin Lin and Curtis Milhaupt from the law schools of the City University of Hong Kong and Stanford University, respectively, that recently crossed this Bystander’s desk shows that the policy has been less rigorously adopted by SOEs than might have been expected.

However, the authors also find that one in 16 stock-market-listed private companies had also taken it up, mainly, they conclude, as a way of signalling their fealty as compliance is not mandatory in the private sector. 

The research covers the period from 2015, when the party-building policy was launched, to 2018. It does not cover the ‘rectification’ campaign against privately owned technology companies to ensure their alignment with national goals, which will likely have spurred more compliance with the policy.

Among SOEs, adoption ranged from token changes to substantive accession of corporate control to the Party, for example, by combining the roles of company chairman and secretary general of the Party unit within the company, with the appointment being made jointly by the Party and the company.

The more politically connected an SOE is, the more compliant with party-building it tends to be. The authors identify a similar effect among private companies, with adoptions of the policy most prevalent among firms with politically-connected directors or chief executive officers.

The study covers all 3,446 A-share listed nonfinancial Chinese companies, which were grouped into three categories:

• those with more symbolic provisions, such as simply referencing the Party constitution in the firm’s corporate charter; 
• provisions that allow the Party to appoint, manage or supervise corporate personnel; and 
• provisions concerning the party’s decision-making powers within the firms.

Nine out of ten private companies that voluntarily amended their charters only adopted symbolic or less material provisions. This implies a broad reluctance to allow party intervention in day-to-day corporate management.

Even among those that did accede in allowing more Party intervention, there was a notably low adoption rate for provisions such as management’s prior consultation with the party committee, the dual appointment of the chairman as also the party secretary, and the appointment of a full-time deputy party secretary.

As with SOEs, these three provisions proved to be the least popular among private companies, the researchers suggest, because they allow the Party to monitor and intervene in daily management. 

That, in turn, suggests that the party’s demand for political conformity on the part of the business sector is constrained not only by agency problems but also by market discipline and corporate law to a greater extent than is commonly assumed. 

Nonetheless, as the authors observe, all Chinese firms, regardless of state or private ownership, must remain in the Party’s good graces to grow and prosper.