Disappointing growth momentum in China was driven by the Omicron wave and the country’s strict lockdown response, as 2022 GDP growth rate by far missed the official target of 5.5%, coming in at 3%. Zero-Covid response measures blunted the transmission mechanism of the government’s support policy measures, making them less effective in stimulating economic activity. Consumption (39% of GDP) was substantially curtailed by the impact of the zero-Covid policy (ZCP), contributing only 1.2 percentage-points (ppts) to GDP growth in the first three quarters of 2022, compared to around 4.1 ppts in the five-year period prior to the pandemic. Solid export growth provided a strong lift for the Chinese economy over 2021 and most of 2022, with net exports (trade in goods and services stood at 34% of 2020 GDP) contributing 1.0 ppt to growth in the first nine months of 2022. But with the global environment souring amid a world economic slowdown, there will be a rotation of growth drivers from exports to household consumption as China moves rapidly towards reopening in 2023. Investment (42% of GDP) will likely maintain a stable contribution (0.8 ppts in the Jan-Sept 2022 period) as the real estate sector is expected to stabilise, while growth in manufacturing and infrastructure investment slows modestly. The easing of the zero-Covid policy in December 2022 signalled a shift towards reopening in 2023, though the rollout remains highly uncertain given that looser rules contributed to a sharp rise in infections, which disrupted production and supply chains. While reopening boosts Chinese consumption, full recovery will take time as, barring the ZCP impact, weaker income recovery, the Chinese people’s strong preference to save, and shrinking net wealth (associated with declining financial and home asset prices) have also affected spending behaviour.
As far as the property market is concerned, a more comprehensive package of housing policy measures announced in November 2022, which addresses not just housing demand and project completions, but also developers’ financing woes, will likely help stabilise the real estate sector (7% of GDP, but up to 29% with property-related activities). Again, structural factors such as demographic changes and supply overhang in lower-tier cities are long-term downside risks to the housing market.
Inflation will likely remain subdued in 2023, reflecting weak domestic demand, but also other factors such as greater weight given to food items, especially hogs, than in other main economies, and lower imported consumer goods due to Chinese industrial capability. Sustained disinflation pressure and durably below-trend growth will provide justification for the PBOC to maintain an accommodative monetary policy, with some room for more easing measures, but contingent on China’s economic performance, CNY depreciation and capital outflow pressures.
Fiscal and external balance
Strong export performances since 2020 are likely to come up against strong headwinds in 2023 amid weaker global demand and supply chain normalisation. Expected widening of the services trade deficit as China reopens coupled with the return of Chinese outbound tourism lead us to believe that the current account surplus will narrow in 2023. Fiscal policy will remain a key driver of the 2023 economic outlook, with the budget deficit staying around 3% of GDP. The government is expected to announce more stimulus support to stabilise the economy, following the Central Economic Work Conference, which emphasises boosting domestic demand in 2023. The National People’s Congress (NPC) in March will provide a clearer picture amid growing expectations of an official 2023 GDP target of above 5%.
Xi consolidates political power
Xi Jinping secured a norm-breaking third term as General Secretary of the Communist Party of China (CPC) in October 2022, with the politburo standing committee, the highest decision making body of the CPC, endorsing four changes, all known to be allies of Xi. Shanghai Party Chief Li Qiang is slated to be the next premier in March 2023 after the annual session of the NPC, replacing Li Keqiang. Conventions of the Party’s political transition appeared to have changed, with several people aged 68 or older promoted to the Politburo - for example, foreign minister Wang Yi is 68 - or extended their Politburo membership - CMC vice-chair Zhang Youxia is 72. More important, the economic and financial team is set to be completely reshuffled. The outcome of the 20th Party Congress highlighted Xi’s prevailing dominance within the Party, suggesting that recent troubles, including economic woes, discontent with the zero-Covid policy, and increasingly strained relationships with Western advanced economies, failed to loosen Xi’s grip on power. There was no mention of a designated successor, which hints at the possibility of Xi holding on to power beyond a third term.