COVID-19 and Related Controls Obstruct China’s Path to Recovery  

State of China's Economy Recovery – China remains highly vulnerable to COVID-19. The latest data suggest that the economic momentum is quickly weakening, and the outlook is not strong. The recent spike in new cases following the government’s decision to ‘optimize’ COVID-19 controls, and the consequent reimposition of restrictions, shows that shifting away from this strategy will be a very gradual process. COVID outbreaks and restrictions will remain the key challenge facing China’s growth recovery over the coming months.

Investment Trends –  Growth in Fixed Asset Investment (FAI) softened, increasing by 5.5 percent y-o-y in October, compared to 6.6 percent in the previous month. Property investment continued contracting, while investment decelerated in infrastructure development and, especially, in manufacturing. Given ongoing uncertainty about the demand outlook, especially the weakening of external demand, investment growth will continue seeing downward pressures and remain dependent on policy stimulus as a key driver. 

Consumption Trends – The tightening and reimposition of social distancing restrictions and lockdowns to face the resurgence in COVID-19 cases across China led to a rapid growth contraction of retail sales in October. The labor market is also facing mounting pressures. And while depressed consumer demand has restrained inflation, China’s central bank (i.e., the PBOC) has warned about potential inflation risks. 

Trade Trends – China’s export growth in October dropped sharply from 5.7 percent y-o-y in September to negative 0.3 percent in October. We expect continued weakness in China’s export growth during 2023, driven by the softening of external demand from major economies.

Implications for Business

The past weeks have seen a series of policy measures aimed at addressing headwinds and improving confidence:

1. Several ministries released 15 measures to facilitate foreign investment, especially in hi-tech, advanced manufacturing, green tech, and R&D;

2. The central government issued 20 measures to optimize current COVID-19 control measures to reduce their negative economic impact;

3. The PBOC reportedly issued a 16-point plan to ease restrictions on financing for real estate developers;

4. The meeting between Chinese President Xi Jinping and US President Joe Biden at the G20 Bali Summit signaled a desire to stop the escalation of tensions.

These developments led to an immediate positive response in capital markets that fueled unrealistic optimism about the outlook. But China is not ready to shift away from ‘dynamic zero-COVID’, given low vaccination rates amongst the elderly and widespread fear of the virus among the ordinary people. The measures to support real estate financing are aimed at preventing a debt crisis, not at reheating the market. The global growth slowdown will continue affecting external demand. And while the meeting between Xi and Biden may have stopped further escalation of tensions, it did not stop the decoupling trend.

As such, while the latest developments should reduce the downside risks of growth forecast, our base-scenario assumptions for 2023 remains largely unchanged, and our growth forecast for China 2023 is still at 5.1 percent.