Insights on China's new policies, reform initiatives and economic data brought to you from Lead Analyst Jens Presthus
20 December 2022
Policy priorities for 2023: revive the consumer and appease the investor
Key takeaways
Ending zero covid represents an obvious tailwind for China’s economy in 2023. But weak external demand and a property market in structural decline will hold back activity.
Beijing knows that it will take time for consumers to return to normal economic behaviour. It has therefore hinted that consumption-targeted stimulus is on the cards.
Xi may decide to remove sanctions on MEPs to get the CAI ratified. This would be a significant geopolitical win and also help stem the outflow of foreign investors.
Consumption-targeted stimulus needed for a sustained post-zero-covid rebound
China’s exit from zero covid will be swift, but also challenging. It is not unlikely that most restrictions will be removed by Chinese New Year in late January. Allowing citizens to spend a normal holiday season for the first time in three years would be a significant sentiment boost. At the same time, ending zero covid will also come with significant sacrifice. The good news is that we know from experience that what comes after the difficult transition arguably is better than sticking with zero covid. Yes, China is a big country with a sub-par health system, but the same is true for India. And India has seen one of the strongest recoveries of emerging economies worldwide.
At the same time, a sustained recovery remains elusive. This is partly because it will take some time for citizens to adjust to living with the virus and return to normal economic behaviour. Q1 will therefore not see a significant uptick in activity. There is also nothing that indicates that the real estate sector will rebound in 2023. Beijing remains set on reducing the size of the sector, even if it is offering more financial support to ensure the delivery of pre-paid homes. Indeed, policymakers have lately been telling developers that they need to understand they are operating in a “new development model”. Reform, in other words, is here to stay. As a consequence, job creation and wage growth across the sector’s value chain will remain weak. Falling home prices will also negatively impact demand because most household wealth is tied up in the property.
The end of China’s property party
YTD YoY growth in real estate investment by region, %
Global downturn to hit Chinese exporters
Exports to the EU, $ bn
Source: NBS, General Administration of Customs
In addition, with many developed economies heading towards a recession that policymakers cannot spend themselves out of, China will not be able to export its domestic demand deficiencies to the rest of the world. During the eurozone crisis, companies in China’s manufacturing sector pivoted towards property investment to dampen the blow from declining export orders. Today, this is not an option.
The difficult macro environment has increased the likelihood of consumption-targeted stimulus. Policymakers seem to understand that without robust demand, there will be no sustained rebound. New guard officials, such as He Lifeng - head of the National Development and Reform Commission and heir apparent to Vice Premier Liu He – have stressed the importance of providing better public services for migrant workers to free up precautionary savings. The Politburo meeting in early December dedicated considerable time towards the topic, while this year’s Central Economic Work Conference highlighted the need to increase income for workers – perhaps the biggest stumbling block China needs to overcome to become a high-consumption economy. Even more forceful policies are being proposed by a growing number of prominent policy advisors. They are calling for stimulus checks to be sent out to citizens – just as the US did during the height of the pandemic.
Stimulate the consumer, and it will spend
Yoy growth in monthly retail sales, %
Source: CEIC
This is unusual because policymakers and advisors tend to view cash handouts with scepticism. They do not like to give people money without knowing what it will be used for. But with stagnant wage growth and continued property market uncertainty, President Xi Jinping and his advisors may conclude that a sustained post-zero-covid recovery will never be achieved unless they increase direct support for households.
Xi has launched a campaign to win over Washington’s allies
Relations with the US will only get worse in 2023, even if it may look like tensions are easing on the surface. Xi and Biden will have more “candid and constructive” conversations, but the latter will also continue to announce punitive measures targeting the Chinese economy. It is, however, not likely that Xi will respond in kind. He will be wary of creating an unnecessarily difficult external environment at the same time as China is going through a challenging economic transition.
Instead, to counter the US, Xi will focus on wooing Washington’s allies and economic partners. The EU’s largest member states have already made it clear that they have no interest in blindly following US policy on China. They have also expressed their appreciation of strong economic ties with Beijing, which they don't want to jeopardise at a time when a difficult recession is looming.
Xi will want to take advantage of this favourable environment by for instance removing sanctions on MEPs to get the Comprehensive Agreement on Investment (CAI) ratified. This could happen before or during the EU-China summit which usually takes place sometime in the spring not long after the National People’s Congress. Some may argue that making such concessions would be a sign of weakness, but it could equally be seen as a strategically smart move. Getting the CAI ratified would not only be a significant geopolitical win for China vis-à-vis the US, but it could also help stem the decline in inward FDI and thereby support China’s high-tech ambitions. It is not by accident that improving the environment for private enterprise and foreign investors was topping the agenda during the Central Economic Work Conference.
Foreign investors are losing interest in China
Average annual value of greenfield FDI, $ bn
Source: UNCTAD
American allies in the Gulf are also high on Beijing’s diplomatic priority list. This was evident during Xi’s big visit to Saudi Arabia – with the host country clearly also valuing warm relations with China. The revamped Belt and Road Initiative – which was mentioned several times in the meeting’s readout – will likely play a central role in the expanding China-Saudi partnership. Even if Beijing is pulling back from loss-making development lending in Sub-Saharan Africa and Latin America, access to commodities and strategic trading routes is still of critical importance to China.
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