Chinese Economy 2023: back to normal?

Last year, growth in the Chinese economy slowed. The measures to curb covid have lowered industry output and dampened consumer sentiment. After popular outcry over the imposed measures, the government has now largely lifted the restrictions and is refocusing on promoting economic growth.

The Chinese economy seems to have touched the bottom in 2022. The lockdowns in China to fight the fast transmissive Omicron variant ended up being a very costly and ineffective exercise, led to lower productivity and weaker domestic demand. In the meantime, the global economy slowdown caused the demand for exports to shrink significantly. As a result, the economy growth fell hard behind the target of 5.5%.

Surprising turnaround

The Chinese policy makers nevertheless surprised the world by taking a U-turn on the Covid measures and pivoting the policies back to boosting economic growth. Since November, the Chinese government gradually removed nearly all the restrictions related to Covid. No more mandatory quarantine and excessive testing, people in China could finally restart the normal life that they were accustomed to. During the new year holidays, people across China were on the streets celebrating. Cinemas, restaurants, hotels, and theme parks start to see more clients again. Seeking a new year offensive, groups of Chinese business executives flew to Europe and Japan with charted flight sponsored by the government to hunt for more export business opportunities.

Ensuring order is restored

The policy U-turn is not only on the Covid restrictions. The Chinese authorities announced further support to the private sectors to boost employment and income with the goal of boosting domestic demand. The government pressed the stop button on the regulations that once cracked down Chinese tech giants, online education, and real estate developers. Didi, the ride-hailing company, which was at the center of the tech crackdown, with its riding app banned from major app stores, now is allowed to operate the app on the app store again. The Chinese government also vows to improve the balance sheet of the real estate developers and help to reduce those ‘unfinished buildings’.

China back on the table for investors

Global investors cheered on the new economically friendly policies. The MSCI® China Index marked a considerable rebound of 50% since the beginning of November 2022. But the potential of a full reopening has not yet been unleashed. The fast-reopening leads to a higher rate of Covid infections. In the short term, the disruptions in production and consumptions will remain due to the vast number of people contracting Covid. However, we would expect a faster rebound in consumption from Q2 as the population starts to gradually gain immunity to the virus, especially in sectors such as retail and leisure (Factor Investing Research, Vescore). Meanwhile, the loosening monetary and fiscal policies will help the Chinese economy to return faster to its path of economic growth.

In contrast to major developed markets, the inflation level remains below the target of 3% and the PBoC still has room to further lower the interest rate if needed. The latest US number shows that inflation continues to cool down with the labor market staying strong. The chance that the world dodges a recession is getting higher. We could see exports in China to improve further if the global economy resumes the growth momentum. Furthermore, over the past years, the Chinese government has been pushing several economic reforms to advance the technology-driven and low carbon green economy. Certain areas could emerge as the new growth driver going forward, as we can see from the fast growth of the Chinese electric vehicle industry.

The confidence in the Chinese economy has been restoring over the past months. Despite the short-term uncertainty from fast spreading Covid among the population, the outlook for the Chinese economy back to the growth target in 2023 is rather promising, even though some political and economic risks to investments in China remain.

Vontobel China New Vision Index

In spring 2021, the National People's Congress of the People's Republic of China adopted the latest five-year plan. These plans describe the country's desired economic, social and political objectives. The focus of the current cycle is on the domestic market, the digital economy and environmental protection.

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