China’s macro outlook is evolving quickly. The leadership concluded the annual Central Economic Work Conference (CEWC) on Friday, with a clear emphasis on boosting growth and especially confidence. The meeting convened even as Covid cases rip through Beijing and other large cities, with China now one month into a hasty exit from the zero-Covid policy.
Signals from the CEWC, and the rapid pivot underway, point to an economic recovery that starts in late Q1 and gains momentum in H2. But there are risks both with the pivot and the effectiveness of policy support, highlighted below. We will further unpack these themes in a webinar on Monday (20 December) at 10AM ET: please register here.
The leadership embraces a rapid pivot
It is now clear that China is firmly in a rapid pivot scenario. Not only is there explosive growth in cases in large cities such as Beijing, but government policy has also explicitly shifted from containment to treatment. A gradual pivot, with China aggressively flattening the curve of cases, had seemed possible a few weeks ago but would now be extremely costly to execute; the leadership seems intent to get this over with quickly, and this will remain the case barring a large spike in deaths – and perhaps even then.
The rapid pivot will be rocky, both for the population and the economy. Anecdotally, cases in Beijing are producing high fever for many people but generally not severe cases, though the FT is reporting a mounting death toll. Fever clinics are crowded and there is a shortage of over-the-counter fever medicine. We are also hearing some reports that Guangzhou’s hospital capacity is stretched thin with very long wait times to see a doctor. These signs suggest a public health system in large coastal cities that is under strain but not experiencing a calamity.
China is still in the early days of its pivot, and three years of the pandemic suggests one should be humble with predictions. The toughest test will come when outbreaks hit poorer cities in the interior, with weaker public health systems.
The experience of China’s peers in the region that have seen a rapid pivot – in which a sizeable share of the population becomes infected quickly – suggests a relatively early economic recovery, as governments are able to reduce containment measures soon after the first major wave passes. This was the case with South Korea, Taiwan, and Singapore; Japan, by contrast, has had a much more gradual pivot, with slower growth in cases but stringent containment measures and a slower recovery.
Public health officials in China are generally forecasting cases to peak in January and February; given China’s size, the timing will be highly variable across provinces. By late February and March, the economy in many provinces should start to normalize as households become less risk averse and governments reduce remaining containment measures.
Economic conditions will be rocky in the meantime. Demand will be very weak in December and January, including through the lunar new year holiday that officially starts 22 January. The service sector, a key source of employment, will be especially hard hit. There is also a risk for supply chains as workers become sick, but these disruptions are likely to be temporary relative to the impact of long lockdowns in Shanghai and several other cities earlier this year.
China’s outlook is also more complicated than some of its peers. The economy has developed at least some “scar tissue” from three years of strict containment measures and lockdowns that will take time to repair. Small firms, which account for the majority of employment in China, have fared poorly and don’t receive as much support from the government and credit system as larger firms. Increased employment will be important for household’s willingness and ability to spend, which may also take some time to recover. Beyond Covid, the property sector still faces an uncertain outlook, while slowing exports will impact the manufacturing sector and associated business investment.
All of this means that China’s stimulus response, previewed at the CEWC on Friday, will be key to strength of the recovery.
Beijing is keen to boost confidence, but questions on follow-through
The statement from the CEWC places a strong emphasis on promoting a recovery in 2023, and especially boosting the longer-term confidence of households and firms. But the degree of actual follow-through on stimulus policies, which face a number of constraints, is less certain.
On the confidence side, there are numerous signs that political and regulatory settings will be looser and more friendly to business and investors:
- There are clear expressions of support for the private sector
- While e-commerce firms will remain under scrutiny, the statement suggests a much-reduced risk of aggressive regulatory actions next year. It pledges to “vigorously develop the digital economy, improve the level of normalized supervision, and support platform companies to play a role in leading development, creating jobs and competing internationally.”
- Language on the environment for foreign investment is also positive
- There is no mention of “common prosperity”
But the outlook for specific macro policies to support growth is more ambiguous:
- Xi remains intently focused on his broader long-term policy agenda. The statement puts a strong emphasis on “high-quality development” and Xi’s “new development concept,” all of which imply a reluctance to over-stimulate the economy and a focus on reducing systemic risks and supporting key initiatives such as technological self-reliance and economic security. This is not a growth-at-all-costs approach.
- Beijing will further step up support for the property sector, including ensuring the delivery of unfinished buildings and improved access to financing for “high-quality” private developers. While this pledge reduces risk of a further deterioration in the real estate sector in 2023, it does not necessarily mean a quick or robust recovery in property investment, given headwinds including high levels of debt for developers, subdued confidence on the part of households and creditors, and Beijing’s determination to move to a new, more conservative model for the housing market.
- The statement suggests stable fiscal and monetary policy. The central government will likely leverage its own balance sheet to support infrastructure investment in 2023, but the statement’s mention of local government debt risks, a key systemic concern for Beijing, suggests localities will remain under fairly tight financial constraints. Monetary policy will stay accommodative for now but is unlikely to become looser, and there is a danger of tightening financial conditions later in the year as the PBOC looks to renew attention to financial risks.
- The statement puts a high-level of importance on boosting household consumption, which the Party also pledged to support with a long-term plan released earlier this week. But these policies are short on details, and it remains to be seen if the government – long averse to providing much direct financial support to households – is becoming more flexible in this regard.
In short, while Beijing has moved into a pro-growth mode, the Covid pivot is doing much of this work. Given Xi’s broader priorities, and limiting factors such as concern over long-term financial risks, the follow-through to growth is still a big question. This will be especially important if China’s Covid pivot becomes especially rocky or prolonged, given the unpredictability of the virus.
