Macro Insights Weekly: Assessing China’s recovery momentum
- China’s PMI has jumped, reflected positive sentiment of manufactures
- Liquidity and interest rates are evolving in a supportive manner
- Bank lending has picked up after a long time
- Credit spreads have compressed, reducing stress of the corporate sector
- PBOC’s efforts are bearing fruit, helping improve financial market conditions
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Commentary: China’s recovery momentum
Setting macroeconomic stabilisation as a key priority, China’s National People's Congress kicked off on Sunday with a 2023 growth target of 5% and fiscal deficit projection of 3% of GDP. These figures reflect the somber realisation that after the sharply below-trend outturn of 2022, growing in 2023 would come with its set of challenges. Substantial support for local governments was promised as tax revenue remains a drag due to the lackluster property market. Investment in technological self-reliance, as expected, is a cornerstone of public sector policymaking.
Attainting 5% growth in 2023, even with the presence of a favourable base effect, would require substantial rebound in household spending and business. Additionally, an enabling macroeconomic environment, with ample liquidity, low interest rates, and credit spreads would be necessary.
Early indications for that are somewhat encouraging. Manufacturers have breathed a loud sigh of relief with the re-opening in January-February, pushing up the PMI sharply. Freight index rates, which displayed utter despondency around China’s slowdown last year, have at long last begun showing signs of life. Overall, China’s macro data have begun surprising on the upside sharply, outpacing the US and Euro area. This helps add confidence to our 5.5% real GDP growth forecast for 2023. Besides improving business expectations, high frequency indicators suggest that consumer demand, market distribution, and industrial production are also picking up. We expect to see travel, tourism, and events to surge, as has been the case in a typical post-pandemic recovery seen worldwide.
Consumption and business activities will get a major nudge from the public sector, we’re sure. Even before announcing a slight increase in the fiscal deficit for the year, the authorities have stepped up spending and liquidity measures to support overall economic activities. Total social financing and new bank loans have jumped this year so far, which would translate into higher consumption and investment. The rise in new bank loans in particularly notable, as there have been hardly any instances of confidence expressed by the banking sector in recent years.
China’s monetary policy stance is at the opposite end of most parts of the world. Unlike rate hikes by several hundred basis points by the Fed or ECB, the PBOC has been cutting rates and injecting liquidity. As a result, key funding rates for banks have eased, while rising demand for funds have pushed up activity at the interbank lending window.
Lending rates have also begun to ease, which is much needed for heavily indebted households and firms. These developments ought to be helpful for the economic outlook.
Orderly debt issuance and refinancing are critical for the functioning of the Chinese economy, which was hampered by spread widening last year. The opposite has transpired this year, with spreads compressing, easing stress on the corporate sector. China’s economic engine is beginning to hum, helped by macro policy support.
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