Reopening of China carries risks and opportunities - New podcast episode
China has recently reopened its doors after an unprecedented closure of its economy. Transformed by this challenging health crisis episode, the country is undergoing numerous changes, whether they are political, social, or economic. While it remains a land of opportunities for businesses, some balances seem precarious: a trade war with the United States, heightened tensions with Taiwan, a rapprochement with Russia, and complex relations with other Western powers. Is the world's second-largest economy still as indispensable for businesses as it once was?
Two experts from Coface reveal the risks and opportunities of this country for businesses, in light of tumultuous current events. Bernard Aw is Chief Economist for the Asia and Pacific region, and Raphaël Rousselot, Chief Underwriting Officer Asia Pacific.
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Bernard, can you describe the economic situation in China right now?
China’s economy was unable to fully recover from the shock of the pandemic as consumption was constrained by the zero-covid policy, in addition to regulatory action on sectors such as housing, technology and education. The removal of strict Covid-19 restrictions was therefore generally seen as positive for the Chinese economy. In the early months following the end of zero-covid policy, economic activity, particularly services, showed a solid rebound. In the first two months of 2023, industrial output was up 2.4% year-on-year, retail sales rose 3.5%, and fixed investment growth came in above expectations at 5.5%. The post-Covid recovery was earlier than expected.
Politically, Chinese president Xi Jinping was able to strengthen his power base, replacing key economic positions in the government with people that are known to be loyal to him, such as new premier Li Qiang.
Raphaël, after the reopening of their economies and borders, a lot of countries, with mature or emerging economies, have seen an economic catch-up effect. Was it the case in China? Did we see a boom in business activity?
In China, we can monitor business activity trends in almost real time thanks to our internal data. For instance, by tracking the frequency of requests for cover against payment default from a period to another. Our data show increasing demand for retail food and beverage on hospitality sectors.
Obviously, the airline companies have also benefited from the end of Covid-19 restriction since the population is fully mobile. However, regarding private conceptions, concerns about unemployment or living costs may affect consumer sentiment in the near future.
Bernard precisely, what is the country's economic outlook in the short/medium term?
China’s economic outlook remains challenging in the short to medium term as the country faces multiple headwinds, including weak household spending, property market decline, and constrained local governments’ finances. The central government sets a GDP growth target of “around 5%” for 2023, in which Premier Li said achieving the target “is not an easy task and requires redoubled efforts”. The ability to revitalise consumption and stabilise the housing market will be key to a robust economic rebound. We are expecting China’s economy to expand by between 4% and 5% this year.
Can you tell us a bit more about the real estate market? How things have developed recently? Is the sector under control?
The November announcement of a 16-point rescue plan by the central bank and the banking and insurance regular represents the most significant change in housing policy since 2016. This announcement provides the clearest message that managing downside risk and restoring housing market stability has become a policy priority and part of an important effort to pursue economic stability. Most significantly in this plan were measures that address developers’ funding problems.
While the real estate market remains under pressure, there is some stability setting in. The Real Estate Climate Index has stopped falling. The decline in home prices has slowed in February, and other housing indicators such as real estate sales and investment also looked to have reached a bottom. A strong rebound in housing activity like what we saw in 2015 is very unlikely, especially when the structural downshift in housing demand is a key constraint.
Raphaël, in a mixed local and global economic context what are the main business opportunities you see in Asia? Which sectors could benefit from the reopening of economies?
Asia, the whole region, is benefiting from the return of Chinese tourists, especially Southeast Asian economies like Philippines or Thailand where tourism contributes to over 15% of GDP.
In those countries, the rebound in tourism will have positive effects on labor markets. What will then support domestic consumption on retail sector.
For manufacturing industries, on export economies like South Korea or Japan. This is more balanced as China recovery alone cannot compensate the current global trade environment.
Regardless of the post-Covid recovery, what other sectors are promising in China for the years to come?
Population is aging and by 2040, around 400 million or 30% of Chinese population will be 60 years or older. Meaning there will be opportunities in health sector for medical and pharmaceutical services or for medicines that are publicly insured. The ICT sector will offer business opportunities in the coming years as well.
China government policies aim to accelerate self sufficiency in high tech, with tax incentives on financing supports. Chinese companies are today encouraged to invest in R&D in domains like artificial intelligence or advanced chips.
Green energy is also getting strong public support from electric vehicles to renewable energy, including solar or wind. But whatever the industry is, market opportunities for foreign companies could be constrained by:
1- sanctions from western economies and two by China regulation itself.
2- China's n°2 official have been quite reassuring for foreign companies. He has emphasized that China should expand market access and should facilitate trade by removing government controls.
Bernard, on the political level, what lessons can be drawn from the last CCP congress and what about the reversal of the anti-Covid policy?
China’s 20th Party Congress that took place in October last year marks the consolidation of power by Xi Jinping, who secured a norm-breaking third term as secretary-general of the Communist Party of China, and as chairman of the Central Military Commission. Conventions of the Party’s political transition appeared to have changed too with several members at age 68 or older being promoted into the Politburo, or extended their Politburo membership. New premier Li Qiang also has not being a vice-premier or any national-level governing experience unlike his predecessors.
The decision to exit from zero-Covid policy was unexpected and sudden, and without preparation at the end of November last year mainly because the political incentives to maintain the policy was reduced, the economic costs prohibitively expensive, and increasing evidence of its ineffectiveness against the highly transmissible Omicron variant. The protests prompted China’s leaders to cut its losses and exit quickly. A lesson drawn here perhaps could be that the sudden reversal reveals that the leadership still has a pragmatic side, and its pivot away from zero-covid strategy showcases its tactical flexibility.
What is the social situation? Strict control measures, lockdowns and mass testing requirements have ended up fuelling public tensions, which contributed to demonstrations in several cities towards the end of 2022… Is it still the case?
After the anti-covid demonstrations late last year, and the end of Covid restrictions, there have been no reports of any protests. The social situation is more stable, and the Chinese are now travelling outside of the country once again.
Raphael mentioned the unemployment rate, which is still high. What is the outlook?
China met their labour market targets in 2022, achieving unemployment rate of 5.5%, and created 12 million urban jobs despite a challenging economic and health environment. The government continues to prioritise stabilising employment in 2023. However, youth unemployment remains very high. Data showed a rise in youth unemployment at the start of 2023, reaching 18.1% in February. This is three times the overall urban unemployment rate of 5.6%, and notably higher than the average OECD rate of 12.8%. This year, a record 11.6m graduates are expected to join the labour force. The internet, real estate and education sectors that were traditionally known to hire fresh graduates in large numbers are under pressure after strict regulatory pressure on these industries led to layoffs and a sharp scale-back in operations. It will remain challenging for the Chinese government to create enough jobs.
The health crisis highlighted the very strong dependence of most countries on China. Now there is a clear desire of some developed countries to free themselves from this Chinese dependence. Is that a risk for Chinese growth?
Because of how integrated China is in the world trade, and how it has emerged through the past two decades as the world’s factory, China has a very important role in global supply chains. As you highlighted, COVID-19 pandemic emphasised how interlinked the world market is. So there is a desire, as you said, to build more resilience into countries and companies’ supply chains, by diversifying into other markets either nearer to the consumer market or a ‘friendly’ country, so-called near-shoring and friend-shoring. This supply chain diversification trend is expected to continue in the coming years. This is therefore a risk for Chinese growth, and the Chinese leadership recognised this risk, which is why they came up with the dual circulation strategy, where improving domestic circulation or domestic demand is a key to future growth. China is not abandoning trade and looking inwards, but they recognise that external markets may not provide the same level of growth compared to the past.
Raphaël, a few years ago, China was a top priority for a lot of companies, a market too big to be ignored. Has it changed? Are those companies choosing to look elsewhere now?
Global players are diversifying their supply chains to reduce their dependence on China. Multinationals like Apple, Sony, Samsung, Nike or Siemens to name few, have shifted some of their production lines out of China in Vietnam, Thailand or Malaysia. India as a fast growing economy, is a logical alternative, with its young unskilled workforce and with labor costs that are lowered than China.
However, the relocation of manufacturing facilities is not driven by economic considerations only. This is also the result of the ongoing trade tensions between China and the US on rising geopolitical risks in Asia Pacific region.
And precisely, at Coface, are you seeing an increase in requests for protection linked to risks and geopolitics in Asia and more particularly in China?
Export companies benefiting from Coface solution are covered against political events. That's why we don't see an increase of request related to political risk.
It has always been a topic for risk manager, but what we see is that political uncertainty is now one of the main, if not the first, source of concern for risk cover companies, It was not the case a couple of years ago.
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