February 28, 2023
BEIJING – It is widely believed that China’s economy will rebound this year. There are two factors underpinning the country’s economic recovery. One is the optimization of COVID-19 management measures and the other is substantial policy adjustment for the real estate industry.
The rapid peak of the pandemic at the end of last year has laid the foundation for China’s economic recovery in 2023. Thanks to the substantial policy adjustment for real estate launched in November, this year is likely to see no significant decline in the property market but rather a partial recovery.
How much economic growth can be expected for China in 2023?
It is realistic to forecast that China’s economic growth will be about 5 percent in 2023. Although some scholars or institutions predict that there may be high growth this year given the low base in 2022 and the average annual potential growth rate will be about 5 percent to 5.5 percent, it is necessary to recognize that there are many risks and challenges facing a recovery.
The first challenge comes from potential second and third infection waves of COVID-19. The Chinese economy suffered a lot in January due to the pandemic, and the next few months, some fear, may see additional widespread outbreaks of the contagion with a certain impact on the economy, although the impact could be much smaller than that experienced in January. What happened in neighboring economies including Japan and South Korea over the past one to two years has proved this.
A consumption rebound should also be expected, but prudence is advisable. This year will certainly witness so-called revenge buying, but I don’t think consumption growth will reach or exceed 10 percent.
It is necessary to rationally estimate this year’s recovery in accordance with the actual situation and there are several factors undermining this year’s consumption rebound expectations.
The pandemic in China has been around for a considerable amount of time and taken a heavy toll on some who have experienced plummeting household incomes and savings over the past three years, especially for those engaged in the tourism, transportation and catering industries.
The slowdown in China’s real estate industry has also impacted household budgets. The contraction of the real estate industry in the past few years has been the worst in two or three decades, and housing prices in many regions of the country have fallen. In 2022, China recorded some 8 trillion yuan ($1.15 trillion) in excess savings, but bank savings deposits accounted for less than 20 percent for households, while at the same time, 60 to 70 percent were fixed assets such as residential properties. Under such circumstances, the decline in home prices had a relatively substantial impact on many household finances, which may have a certain negative impact on the recovery of consumption this year.
China’s unemployment rate is relatively high. This is particularly so among young people (as high as 19.9 percent in July last year, but a bit better at 16.7 percent in December). Employment will improve this year, but because it is also affected by other aspects of the economy such as real estate, education and training industries, and the platform economy, it is not likely to recover very quickly.
The situation in China is different from countries like the United States. In 2020 and 2021, the US transferred money to household accounts through large-scale fiscal spending such as excessive dollar printing by the central bank, thereby achieving excess savings. However, Chinese households’ excess savings do not come primarily from government spending. In the past few years, a large portion of China’s fiscal expenditure has been spent on nucleic acid testing and other COVID-related projects, which have little positive impact on household savings and finances. Moreover, because of the sharp decline in land sale revenue, payments and other incomes of people working in government and public institutions have declined to varying degrees nationwide.
Also, sectors that have experienced demand being fulfilled will not necessarily see retaliatory consumption. Automobile purchases are one of the most important consumption categories, but the vehicle industry has already enjoyed a lot of demand due to the halved purchase taxes. Although from June to October last year, growth rates of auto sales in China remained above 20 percent year-on-year, the growth pace in November and December slowed. In the first 10 days or so this year, car sales fell by some 20 percent. Therefore, it cannot be concluded that consumption in all areas will rebound this year.
The following is our forecast for the Chinese economy this year as well as some of our policy suggestions.
Although consumption will be the main driving force for China’s economic recovery this year, a quick property rebound is very important if we hope to have rapid economic growth. This year’s real estate performance will not see an immediate V-shaped recovery following the optimization of COVID-19 management measures and property policy adjustments, and instead, may recover slowly after approaching a nadir before rebounding at a certain point.
Financial conditions in various localities are not likely to experience sudden and significant improvements in the near term because this will require much support from an improving real estate market. Even if the property industry recovers significantly this spring, many developers will be more wary of significantly increasing spending on land acquisitions and the sector may not be able to recover to previously seen levels.
Therefore, local governments must achieve a new equilibrium in finance, changing the previous model of high dependence on revenue generated from land grant premiums and land taxes. Such a shift is very painful and may bring some downward pressure on aggregate demand, especially pressure from falling incomes among government employees.
There is also great challenges from the weak external demand for Chinese exports. In 2021, China’s economic growth reached 8.4 percent, with export growth at 30 percent. But export growth is likely to decline in 2023. That means the contribution of exports to GDP this year will drop by a few percentage points from that in 2021.
We need to take into account that exports cannot grow at the same pace as the overall economy due to the high likelihood of a sharp slowdown in the global economy and the impact from the changed consumption structure of other countries in the post-pandemic era.
As for inflation and relevant policies, prices in some service sectors may rise this year due to retaliatory consumption. But in general, many factors including negative export growth can greatly undermine inflationary pressure. On the other hand, as the consumption rebound will not be very strong, and China’s monetary and fiscal policies in the past few years were not as loose as in the US, it is believed that China’s inflation level will remain below 3 percent for most of this year, and overall monetary and fiscal policies will remain mild.
China has reached near-herd immunity at a very fast pace, which is good for economic recovery. Against this background, monetary and fiscal policies will remain relatively loose this year, but the possibility of large-scale stimulus policies in the next few months is not that high. Credit growth may be closer to that seen in 2022, including the expansion of the entire government debt. I believe this year’s social financing growth will also be relatively close to that of last year.
Among all the challenges, the most critical is how to restore the confidence of domestic economic participants through policy measures. Fully restored confidence will significantly shore up any economic rebound this year and beyond.