China may have marked one of the worst years of economic growth on record, but its shorter-term data showed things might get better sooner than expected as the country continues to end its zero-Covid policy.
The nation’s economy grew 3% for the full year of 2022 — the second-slowest growth rate it has seen since 1976. The economy reported growth of 2.2% in 2020.
Quarterly and monthly economic data, however, all exceeded expectations — despite investors’ growing concerns over the surge in infections seen nationwide as China rolled back some of its most stringent Covid restrictions to reopen its economy.
“We see markets and policymakers looking through the readings as all eyes are on the strength and sustainability of China’s post-Covid recovery – reopening is happening faster and earlier, and so could recovery,” Citi’s economists, led by chief China economist Xiangrong Yu, said in a Tuesday report.
“For monthly indicators, the surprise rebound in retail sales and the resilient labor market are both notable,” Citi’s economists wrote.
Others agreed, adding that the government’s fiscal policies have provided more support for growth.
JPMorgan’s global market strategist Chaoping Zhu said, “We expect to see a sustained economic recovery in 2023 as a result of reopening and policy stimulus.”
The People’s Bank of China last week hinted at upcoming changes to its “three red lines” for developers. Introduced in 2020, the measures were aimed at reducing developers’ debt levels and curtailing financial risks in real estate — amid a broader push to limit speculation in home prices.
Zhu added that a recovery in demand is likely to benefit the service and consumer goods industry.
“Service sectors should be the early beneficiary when pent-up demand is released. Sales of consumer goods might also pick up due to improving confidence and continued policy support,” he said.
S&P Global Market Intelligence’s senior economist Yating Xu pointed to further signs of recovery in demand.
“We have seen a gradual recovery in mobilities, passenger flight counts and private consumption,” she said.
Xu expects to see a sharp rebound in the second quarter of 2023 as China continues to prioritize the economy over its zero-Covid policy.
Since the government removed some of its strictest Covid measures, the onshore Chinese yuan has strengthened by more than 6% from the end of November and last stood at 6.7692 against the US dollar.
Has the economy bottomed?
China’s economy may have already seen the worst of pressures in the final month of 2022, JPMorgan’s Zhu said.
He added the weakness was the result of uncertainty surrounding the nation’s zero-Covid policy and a mass infection that followed its steps of reopening.
“Despite the weakness, December might be the bottom of Chinese growth trajectory in the near term,” Zhu said. “High-frequency indicators are pointing to quick recovery of economic activities as the infection has probably peaked across the country.”
S&P’s Xu said health concerns — such as elderly vaccination and availability of testing kits — “are no longer obstacles to the ongoing reopening as most regions reported to have passed the peak of infections and should have naturally immunized.”
“Since the lifting of the zero-Covid policy in early December, mainland China has continued its reopening process despite the nationwide infection increases,” she said. “The government’s increasing pro-growth stance and the economic recovery entering 2023 also reduce the likelihood of a pandemic-policy reversal.”