Macroscope | Why investors betting against China’s economy should learn from 2023

As 2023 nears its end, the mea culpas for inaccurate predictions about how economies and markets would perform this year are coming thick and fast, especially with regard to China’s unexpectedly weak post-pandemic recovery.

Last week, HSBC said “the biggest mistake we made in 2023 was we underestimated how complex China’s structural challenges would be and overestimated the economic recovery”. JPMorgan said the post-Covid-19 rebound “proved more fleeting than expected”, while Bank of America said the post-reopening recovery “has been bumpier than expected”.

While there were concerns about how China’s economy would fare, given that Beijing failed to prepare properly for the abrupt dismantling of pandemic controls, the consensus at the start of this year was that domestic demand would bounce back sharply. Some economists feared China’s recovery would be so strong it would fuel inflationary pressures around the world.

Those expectations were dashed as early as May when it became clear the recovery had faltered, mainly because of the severity of the crisis in the all-important property sector. Excessive optimism quickly gave way to an abundance of pessimism. This proved fertile ground for bearish narratives, even flawed ones such as the claim that China is experiencing Japanese-style deflation and stagnation.

There are good reasons investors have turned bearish on China. The severe loss of confidence in the real estate market – which before the crisis struck accounted for more than a quarter of economic output and remains the biggest source of household wealth – has made investors more sensitive to China’s deep-seated problems. This has fuelled concern about the efficacy of policy measures to support growth and, more worryingly, the growth model itself.

Sentiment towards China has deteriorated dramatically. On October 20, the CSI 300 index of Shanghai- and Shenzen-listed stocks erased all its gains during the fierce reopening rally that began in November last year. According to data from JPMorgan, foreign investors are exiting China “at a rapid pace”, with net outflows from direct investment and portfolio accounts reaching a staggering US$145 billion during the past year.