Macro Insights Weekly: China’s rebound
- It won’t be a smooth ride; near-term volatility around Covid spread is likely
- But 4Q22-1Q23 is likely the cyclical trough, in our view
- Adding to the economic re-opening momentum is pro-growth shift in policy making
- Tailwind from mainland China is an unambiguous positive for Hong Kong
- We are revising up China’s 2023 GDP growth forecast to 5.5% and Hong Kong’s to 6.5%
Commentary: China’s rebound
After a challenging 2022, during which property market distress and struggles with the pandemic sapped economic momentum and hurt consumer sentiment considerably, stars are aligning for a much better 2023 for China. This is critical for the mainland, but also a potentially major positive for the global economy. As it was seen in the aftermath of the 2008-09 global financial crisis, when the Chinese economy’s cyclical strength acted as a strong balancing factor, this year, just as the US and Eurozone economies slow, the world could do with a rebounding China.
China’s economy will experience volatility as the virus continues to spread beyond major cities. Increased travel during the Lunar New Year holidays may cause an explosive surge of infections in rural areas where medical resources are less abundant. But 4Q22-1Q23 is likely the cyclical trough, in our view.
The swift rollback of Covid restrictions has not only brought forward the initial reopening disruption, but also an earlier arrival of herd immunity. Measures taken hitherto such as interest rates cuts and tax breaks to deal with the malaise in the economy will filter through as soon as the initial infection wave retreats.
Adding to the momentum is a strong pro-growth shift in economic policy by the new leadership team. At the Central Economic Work Conference in December, policymakers pledged to revive domestic demand and support the private sector, a marked shift from recent years. Efforts are also gathering pace to aid the beleaguered housing market that contributes one quarter of GDP. Scrapping quarantine for international travelers may rekindle foreign investor enthusiasm, following a sharp fall in inbound M&A transactions and record low levels of greenfield investments in 2022. All this has prompted us to revise up our full year GDP forecast for 2023 to 5.5% from 4%.
We expect PBOC’s monetary policy to remain supportive. Benign inflation (December CPI: 1.8%; PPI: -0.7%) leaves room for further interest rate reduction, which is critical in facilitating the issuance of extra government bonds this year to finance infrastructure projects. Policymakers at the Work Conference promised to support “fundamental housing demand”. To that end, PBOC may further lower mortgage rates and down-payment requirements. Meanwhile, the potential easing of the Three Red Lines could reduce developers’ financial stress.
Financial guarantees might also help, with banks to extend debt financing support and provide more flexible repayment options for private companies. Other measures include subsidies and loans with preferential interest rates for investing in qualified projects (i.e., infrastructure, artificial intelligence, innovation and high tech as well as green energy projects identified in the 14th FYP).
What about Hong Kong? The spillovers will be unambiguously positive as travel to and from mainland China spike. The ongoing, earlier-than-expected, reopening has compelled us to make a quick upgrade to the 2023 HK GDP forecast, from 3.8% to 6.5%. Underscoring the difficulties faced by Hong Kong in recent years, this impressive sounding growth figure would only bring the level of GDP back to 2018 level.
Right now, among the countries in our coverage, with the exception of Thailand (which is a significant beta to China due to tourism linkages), only China and Hong Kong are expected to have a higher growth rate in 2023 over 2022. Some of this is arithmetic and base effect of last year’s laggards being this year’s leaders, some of this is also reflecting an underwhelming global electronics cycle. But the bottom line is that last year’s synchronized global market selloff would likely be contrasted by differentiated outcomes this year, taking their cues from the macro cycle.
Taimur Baig and Nathan Chow
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