Activity picks up as nation optimizes COVID-19 control measures
Hopes are rising that the Chinese economy can make a strong recovery and lead the way for the global economy as the world faces challenges on a number of fronts this year.
Economists have warned that a potential global economic recession is looming as tighter financial conditions weigh on demand while geopolitical tensions linger. According to the International Monetary Fund, "the worst is yet to come", as global growth is forecast to further weaken in 2023.
However, economic activity has shown signs of picking up in China as the nation pursues a smooth transition in its phased response to COVID-19.
For example, according to market tracker Wind Info, 6,316 domestic flights took to the skies on Dec 26, almost double the number a month ago, while the previous day, movie box office takings nationwide rose to 106.17 million yuan ($15.39 million), up from 14.47 million yuan a month earlier.
These positive signs have persuaded a growing number of international investment banks and asset managers to the view that a substantial economic rebound will unfold in China. The rebound will be underpinned by three key factors — a rally in domestic consumption due to reduced COVID-19 disruptions, improving confidence in the property and private sectors, and stepped-up macroeconomic policy adjustments.
Kristina Hooper, chief global market strategist at Invesco, a global investment management company, said optimized COVID-19 containment and measures to stabilize the property sector "could help propel China to be a key growth engine in 2023".
The tone-setting Central Economic Work Conference, held in the middle of last month, prioritized increasing domestic demand by boosting consumption to promote economic growth amid pressure from "demand contraction, supply shocks and weakening expectations".
The meeting stressed the need for better coordination of epidemic prevention and control measures with economic and social development, and called for efforts to optimize response to the epidemic.
Officials and experts said consumer spending will rebound, as reduced disruption from COVID-19 is expected to release pent-up demand, which will be seen after the first quarter and be a key driver for economic recovery this year.
Yin Yanlin, deputy director of the office of the Central Committee for Financial and Economic Affairs, said the optimization of COVID-19 containment measures will create favorable conditions for economic recovery.
"The worst moment is over. With the implementation of optimized COVID containment measures, (China will see) a smoother flow of people and logistics, and accelerated recovery in business and social activities," Yin told a recent forum.
The World Bank said in its latest China Economic Update that consumer confidence is expected to improve as pent-up demand is released after the first quarter.
China has stepped up optimization of COVID-19 controls since November and will scrap the quarantine requirement for international arrivals from Sunday. It has also changed the name of the disease from "novel coronavirus pneumonia" to "novel coronavirus infection".
Hu Yifan, regional chief investment officer and head of macroeconomics for Asia-Pacific at UBS Global Wealth Management, said the Swiss wealth manager forecasts that China's year-on-year retail sales growth may rally from about 1 percent last year to at least 5 percent this year as economic activity returns to normal from COVID-19 and creates more offline consumption.
A consumption rebound may contribute to more than half the nation's economic growth this year, which could rise to about 5 percent year-on-year, up from about 3 percent last year, Hu said.
Investment growth is expected to remain robust this year thanks to infrastructure construction supported by high-speed railway projects, manufacturing investment driven by high-tech sectors, and a narrower slide in real estate development investment, Hu said.
She said such a recovery in domestic demand will likely help offset downward economic pressure from slowing exports amid weakening global demand.
Data from the National Bureau of Statistics, or NBS, show that China's exports rose by 11.9 percent year-on-year to 21.83 trillion yuan from January to November, but single-month growth for November fell to 0.9 percent, pointing to the downside risk facing exports as global growth slows.
Experts said this situation underscores the significance of increasing policy support to ensure a sound rebound in domestic demand, especially as the consumption recovery still faces hurdles such as rising unemployment.
The NBS said China's surveyed urban jobless rate stood at 5.7 percent in November, up by 0.2 of a percentage point from October. The rate among those in the 16 to 24 age group was 17.1 percent.
Ample macro tools
Zhang Bin, deputy director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences, said strengthened fiscal and monetary support will be needed this year to ensure a steady expansion in domestic demand.
This measure is required, as the economy's recovery momentum might not be sufficiently strong for growth to return to a level on par with China's potential growth rate, given COVID-related damage to financial conditions and risk appetite among businesses and households, Zhang said.
To expand domestic demand, the Central Economic Work Conference decided to take a number of steps to raise incomes and support consumption of housing, new energy vehicles and care services for the elderly.
The meeting decided that proactive fiscal policy should be stepped up, with a better mix of tools including fiscal deficits, special-purpose bonds and interest subsidies. Prudent monetary policy should be targeted and effective, with reasonable and sufficient liquidity maintained.
Xu Hongcai, vice-minister of finance, said at a recent event that China's deficit-to-GDP ratio and the scale of local government special-purpose bonds will be set properly to ensure the intensity of government-backed investment does not slow.
As fiscal policy increases support for the economy, Wen Bin, chief economist at China Minsheng Bank, said he expects the nation's deficit-to-GDP ratio to stand at about 3 percent this year, up by 0.2 of a percentage point from the previous year, while the annual quota of special-purpose bonds may rise to 3.8 trillion yuan, up from 3.65 trillion yuan last year.
Wen said tax-cut campaigns might continue, and they could save some 3 trillion yuan in tax and fee burdens for businesses and residents to help strengthen their spending ability.
Liu Guoqiang, deputy governor of the People's Bank of China, the nation's central bank, said the aggregate strength of monetary policy should not be lower than the level last year, and should be raised further if needed — unless economic growth and inflation exceed expectations.
The central bank, which aims to provide "adequate" aggregate support and "accurate" structural aid, has abundant policy tools to hand, Liu said.
Experts said Liu's remarks show there might be further room to ease monetary policy in the first half of this year, with the possibility of cuts in interest rates and the reserve requirement ratio.
Property market
While recognizing the need to reduce overall costs for businesses and households to facilitate their credit growth and spending power, experts called for mortgage rate reductions as a key step to stabilize the real estate sector.
Shao Yu, chief economist at Orient Securities, said, "It is necessary to reduce interest rates, as the housing market faces some obstacles to achieving a soft landing." Cutting interest rates can help bolster homebuying demand and stabilize the property market, which is a major drag on growth, Shao added.
Zhu Haibin, JPMorgan's chief China economist, said in a note that the government may introduce additional measures to support housing demand, such as lowering down payments and relaxing or removing home purchase restrictions at city level.
To promote steady development of the property market, the Central Economic Work Conference stressed the need to ensure prompt delivery of presold housing and to meet reasonable financing demand in the sector, as well as people's basic housing requirements and the need for improved housing conditions.
The positive signals sent by the conference, along with 16 recently announced measures to stabilize lending to the real estate sector, have helped stabilize market expectations for the operations of private real estate developers — triggering hopes for a recovery in home sales this year.
Lu Ting, Nomura's chief China economist, said, "Markets have many reasons to turn positive." Lu cited COVID-19 optimization measures, adjusted regulations for the property sector, and the reassertion of respect for private entrepreneurs as key encouraging developments.
Experts said that with a number of factors aiding China's recovery in the coming year, the world's second-largest economy may become an even more important driving force for the world economy by stabilizing a choppy global economic recovery.
A Goldman Sachs report said the potential rally in Chinese consumer spending may accelerate imports of goods and services, helping boost GDP in economies such as Singapore and Australia, while Thailand and Vietnam could be among the biggest beneficiaries of a recovery in international travel by Chinese tourists.
However, experts said China's unfolding economic rebound is not without caveats, especially considering uncertainties over COVID-19 and a harsher international economic and geopolitical situation.
Boosting market confidence by creating a more enabling environment for private and foreign enterprises is necessary for the Chinese economy to sail through potential headwinds, the experts added.
In addition to pledging to promote the opening up of modern service industries, the Central Economic Work Conference promised that law-based protection would be provided for the property rights of private enterprises and the interests of entrepreneurs.
Tao Dong, vice-chairman for Greater China at Credit Suisse Wealth Management Asia Pacific, said, "Policy stimulus is important, but private investment and consumption remain the bulk of economic activity.
"Ensuring stimulus measures and government spending strengthen confidence in the private sector will be crucial for policies to be successful and sustainable. Further policy details are awaited."
Specific policy efforts have been stepped up.
The China Securities Regulatory Commission said it will work to ensure equal treatment for State-owned and private enterprises regarding market entry, information disclosure and continuous supervision in the coming year. It will also facilitate overseas listings by platform enterprises.