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By Dan Steinbock
Battered by domestic challenges and disruptive external headwinds, Chinese economy has coped with a tough year. The lockdown of Guangzhou’s transportation hub, a rising number of cases in Beijing and other major cities highlight the most recent challenges, along with shifts in Covid strategy.
And if it’s been a hard year for China, it’s been worse elsewhere, thanks to misguided economic policies and ill-advised geopolitics. The risk of recession casts a dark shadow over the US, which remains deeply polarized. The Eurozone is facing a deep recession, Japan’s economy is shrinking, and the United Kingdom is struggling with the worst fall in living standards since records began.
In this dire international landscape, China’s recovery could alleviate global economic prospects.
Until the fall, economic data has reflected challenges. Retail sales and domestic tourism have slumped, mainly because of recurrent lockdowns across first-tier megacities. That’s the net effect of mobility restrictions, which undermine effective demand.
The reverse side of reduced consumption is rising household deposits and falling equity markets. When people feel uneasy about the future, they save rather than consume, while businesses defer investment decisions and investors flee to liquidity.
Industrial production has moderated, due to supply-chain disruptions among the provinces. While automobile production and new electric vehicle production signals progress, the double-digit fall of the semiconductors is the direct result of US-led geopolitics. In turn, the slowing growth of exports reflects recessionary risks in the US and the European Union, two of China’s major trading partners.
Following several years of adverse liquidity in the real estate sector, the new property market support measures, particularly the government’s 16-point recovery plan, will contribute to stabilization.
While default risks remain elevated with weaker developers, larger-quality developers will benefit from consolidation.
Throughout the year, investment, fueled mainly by the public sector, has offset effective demand, as evidenced by higher output in steel and new renewable projects. That will add to debt pressures, particularly at the local level. Meanwhile, the Fed’s aggressive tightening has complicated efforts at monetary easing at the People’s Bank of China.
… to recovery
Yet, the real story of 2023 is likely to be the impending recovery of the Chinese economy. A central determinant in unleashing the Chinese consumption potential, private sector investment and investor confidence hinges on the fine-tuning of the dynamic clearing policy to Covid-19 cases and the consequent broad-based recovery.
Though gradual, the implementation of new rules to better balance the pandemic fight and economic development could result in a surge of pent-up demand by the second quarter of 2023. Such progress would strengthen economic data. Retail sales would climb. Consumer confidence, even domestic tourism, would pick up with rising consumption, including (costlier) consumer durables, while household deposits would decrease accordingly.
Businesses would invest more, including foreign multinationals as their home markets in the West will stagnate. Property markets would gradually normalize and also benefit from pent-up demand. Chinese investors would return to equity markets, which would also be attractive to overseas investors seeking diversification. The MSCI China Index heralds the turnaround; it was 24% up in November, compared to only 2% for the S&P 500 Index.
Industrial production would pick up. Despite demand destruction in the West, the Belt and Road Initiative (BRIA) will promote steady progress on the back of recovery in Southeast Asia, which China is both driving and benefiting from. Less fixed asset investment by the public sector would reduce local governments’ debt pressures.
Downside risks, upside realities
In a downside scenario, domestic woes would prove more adverse because China would shun reforms and opening-up policies. This nightmare scenario is aggressively propagated by neoconservatives in the West, although it has nothing to do with facts.
In reality, both reforms and opening-up policies will continue in China.
Certainly, domestic challenges will remain tough. The population is ageing. The economy needs to move from investment toward consumption. Despite decelerating economic growth, per capita incomes must continue to rise. Worse, these challenges must be met amid the West’s purposeful efforts to undermine such efforts.
Yet, in each case, policymakers have shown a willingness to rely on reforms to overcome challenges. The ageing-related reduction of the labour force will be significantly smaller than expected, as the new UN projections attest.
Furthermore, the share of investment to GDP likely peaked at 42 % in the past half a decade, with a gradual decline set to ensue.
And thanks to continued reforms and “common prosperity” policies, Chinese catch-up in productivity and per capita incomes has climbed to more than a third of the US level, even as secular growth is decelerating to 4% in the late 2020s.
A brighter 2023 outlook
In 2022, analysts and multilateral banks estimate China’s GDP growth at 3 to 3.3%. Then again, the growth rates of all major economies have been downgraded for 2022.
The real story is that, thanks to the expected rebound, China’s growth could climb to 4.5 % to 5.0 % in 2023. The precondition is that prevention and control policies will continue to be refined to make them more agile and flexible and the global landscape remains manageable, as indicated by the easing of Sino-US tensions after the recent meeting between President Joe Biden and President Xi Jinping.
With the recovery in 2023, China’s long-term development goals – primary modernization by 2035 and comprehensive modernization by 2050 – remain within schedule.
Dan Steinbock is an internationally recognized strategist of the multipolar world and the founder of Difference Group. He has served at the India, China and America Institute (USA), Shanghai Institutes for International Studies (China) and the EU Center (Singapore). For more, see https://www.differencegroup.net