An employee works on an assembly line producing speakers at a factory in Fuyang, Anhui province, eastern China, on November 30. Global demand for Chinese products should drive economic recovery as China reopens, and there is also the prospect of greater lift from revived domestic consumer demand. Photo: AFP
Opinion
Macroscope
by Neal Kimberley
Macroscope
by Neal Kimberley
China economy: 2023 recovery on cards as Beijing starts shift from zero-Covid policy
The zero-Covid policy has weighed heavily on China’s economy, so shifting to pandemic management should give it a material boost
In addition to foreign demand for Chinese goods, reopening could unleash domestic consumer demand
China could be the economic surprise package in 2023. That suggestion will not resonate with investors who continue to have concerns both about well-publicised weaknesses in China’s property sector and how Beijing will chart a path away from zero tolerance of Covid-19 and towards pandemic management.
But it is precisely the fact that China recognises the importance of addressing these issues, along with its willingness to take action, that underpins the notion that the Chinese economy could surprise on the upside next year.
First, and in contrast to the situation in China, major Western economies have experienced upsurges in consumer price inflation in 2022 that have required substantive monetary policy responses in the form of markedly higher interest rates and quantitative tightening.
It is almost certain the Federal Reserve will raise interest rates in the United States again, most likely by 50 basis points on December 14. That will not be the last increase in this cycle, and even when the Fed does signal a pause, interest rates are likely to remain higher for longer. The US central bank would not wish to move to easier monetary policy until it is absolutely certain its efforts have been successful in driving down inflation.
Other Western economies face the same challenges as the US Federal Reserve and are also likely to keep monetary policy somewhat restrictive in 2023, but that is not the case in China. There is every possibility that as China continues to make efforts to address deep-rooted problems in the country’s property sector while simultaneously adjusting its policy on coronavirus, the People’s Bank of China will opt to retain accommodative monetary policy settings.
The zero-Covid policy has inevitably been a drag on Chinese economic activity. Consequently, the transition towards Covid-19 management should give China’s economy a material boost.
01:31
Two massive Chinese cities ease Covid-19 curbs as protests spread
Two massive Chinese cities ease Covid-19 curbs as protests spread
That is not to say there will be no bumps in the road as Beijing starts to move away from its zero-Covid policy. Memories of the severe acute respiratory syndrome epidemic of 2003 linger among officials in Beijing, along with a realisation that if there is a pronounced uptick in severe Covid-19 cases, the Chinese healthcare system might be overwhelmed.
Nevertheless, and as China’s top Covid-19 official, Sun Chunlan, acknowledged on December 1, China faces a “new situation” with the virus having mutated into a variant that is more transmissible but less deadly. In Sun’s words, China faces “new tasks as the pathogenicity of the Omicron virus diminishes, vaccination becomes more widespread and experience [grows] in prevention and controls”.
This situation will evolve, but the bottom line from an investor perspective is surely that the likely accommodative PBOC monetary policy support, coupled with the gradual removal of pandemic shackles from industrial production and consumer activity, will result in a level of expansion in Chinese economic activity in 2023 previously considered improbable.
On a cross-border basis, that contrast between brighter prospects for China’s economy in 2023 and a downtick in economic activity elsewhere is something investors might wish to consider when deciding where to deploy their capital.
Of course, there is the argument that any slowdown in economic activity in major markets which China sells to will have a deleterious impact on China’s own prospects. That is a reasonable point to highlight.
02:23
iPhone 14 delays expected after days of violent protests at Foxconn Zhengzhou factory
iPhone 14 delays expected after days of violent protests at Foxconn Zhengzhou factory
But there is also a case to be made that in the years since then Chinese president Jiang Zemin successfully negotiated China’s entry into the World Trade Organization in 2001, the global economy has become dependent – some people might even say too dependent – on goods that are made in China.
But the global economy is where it is. For example, if Western consumers want the new Apple iPhone 14, they need the Foxconn facility in Zhengzhou to be working flat out.
A degree of inelasticity in global demand for Chinese goods will be to the advantage of China’s economy as it reopens fully. However, there is also the real, if arguably underpriced, possibility that the move away from the zero-Covid policy will unleash pent-up consumer demand within China, just as the retreat from lockdown did elsewhere in the world.
An increase in Chinese consumer demand would also bolster President Xi Jinping’s desire for China “to gradually form a new development model in which domestic circulation plays a dominant role” while still fostering exports growth, a concept referred to as “dual circulation”.
All things considered, there is a very real risk that investors who take a downbeat view of China’s economic prospects for 2023 could end up regretting that stance.
Neal Kimberley is a commentator on macroeconomics and financial markets
