According to the National Bureau of Statistics, China’s GDP grew by 4.5% year-on-year in the first quarter of this year, led by brisk retail sales.
That was up from 3.9% in the fourth quarter of 2022, during which Beijing abandoned the strict zero-Covid policy. Retail sales grew by 10.6% year-on-year in March, following on 3.5% growth in the first two months of this year. In the fourth quarter of 2022, they contracted.
However, consumer confidence, although picking up, remains in pessimistic territory below 100.
Fixed investment grew by 5.1% year-on-year in the first quarter, but there was a marked difference between state and private investment, with the former increasing by 10% but the latter barely at all, at 0.6%. Housing sales and starts continued to fall.
Full-year 2022 growth was 3.0%. The official target for this year is 5.0%. The first-quarter numbers get the chase off to a strong start and will put some much-needed wind into the sails of the global economy.
Many international forecasters, such as the IMF, forecast that the official full-year target will be slightly exceeded. Based on the first-quarter numbers, some private economists have upped their projections to 6% full-year growth for this year. Such optimism strikes this Bystander as premature, given that property investment continues to contract and industrial output growth remains below pre-pandemic levels.
If consumer spending starts to slow significantly, endangering the achievement of the official target, then some more fiscal stimulus is likely. With wage growth remaining subdued (the incomes of urban residents grew by 2.7% year-on-year in inflation-adjusted terms during the first quarter), urban joblessness remaining elevated and youth unemployment near record levels, ample grey clouds are hovering over consumer sentiment.
THE INTERNATIONAL MONETARY FUND has left its forecast for China’s economic growth this year and next unchanged from its January projections.
Its latest World Economic Outlook forecasts 5.2% GDP growth for this year, based on China rebounding strongly following the reopening of its economy following the abandonment of its zero-Covid policy last November. It projects 4.5% growth for 2024. This year’s figure would be up from 2022’s 3.0% and a tad above Beijing’s target of 5%.
The Fund notes the variety of stimulus measures taken to encourage the recovery, including additional monetary easing, tax relief for firms, new vaccination targets for the elderly and efforts to promote the completion and delivery of unfinished real estate projects. However, it also reminds us that the headwinds from protracted property market stresses remain a drag on economic activity. . With China absorbing about a quarter of exports from Asia and 5-10% from other geographic regions, the reopening and growth of its economy should generate positive spillovers, particularly for countries with stronger trade links and reliance on Chinese tourism.
A faltering in China’s post–zero-Covid recovery is a significant downside risk.
On the other side, the Outlook warns, an even-stronger-than-predicted economic rebound in China could reverse the expected global decline in commodity prices and raise inflation and inflation expectations, prompting major central banks to tighten policies further and keep a restrictive stance for longer, with adverse effects on growth and financial stability.
Top leadership in Beijing frequently refers to the challenging international situation for China’s economy. In an introduction to the Outlook, the IMF’s Pierre-Olivier Gourinchas notes that:
Some of the more recent slowdown may also reflect more ominous forces: the scarring impact of the pandemic; a slower pace of structural reforms, as well as the rising threat of geoeconomic fragmentation leading to more trade tensions; less direct investment; and a slower pace of innovation and technology adoption across fragmented ‘blocs’.
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.
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.
UNLIKE ON THE other side of the Taiwan Strait, Taiwan’s GDP shrank 0.9% year-on-year in the fourth quarter of last year, taking 2022’s full-year growth to 2.4%, a marked deceleration from 2021’s 6.5%
The fourth quarter was the first year-on-year quarterly contraction since the first quarter of 2016 and the largest since the global financial crisis in 2009.
Inflation, interest rate hikes and the dip in tech demand in Taiwan’s Western markets are suppressing demand for exports from the trade-dependent island. At the same time, Beijing’s zero-Covid policies, only abandoned during the fourth quarter, continued to disrupt business operations and suppress consumer demand on the mainland, which takes a quarter of Taiwan’s goods exports.
The 8.6% fall in total exports knocked 2.6 percentage points off GDP growth, muting the stimulative effect of a 3.1% increase in public spending in the fourth quarter.
The revival of China’s economy in 2023 should give Taiwan a strong boost, especially in the second half of the year, assuming the mainland’s Covid waves pass without significant economic mishaps and stimulus measures kick in.
The economy should return to growth in the first quarter, although the risks are to the downside.
There is still roughly a year before Taiwan’s next presidential and legislative elections, so that should be ample time for the economy to recover.
With Taiwan’s ruling party picking a self-described ‘political worker for Taiwanese independence’, William Lai, as its next chairman, thus putting him in line to be its candidate to succeed the term-limited President Tsai Ing-wen, the economy is unlikely to be the primary election issue.
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.
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.
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.
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.
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.