Earlier this week we published our 2023 outlook for China (link here). The main theme of the report is that China’s leadership is banking on the Covid reopening, and a rebound in confidence, to do most of the work in promoting an economic recovery this year. The amount of support from stimulus policies will be moderate.
This is an environment that may end up being better for markets than for real growth. Beijing’s urgency to lift confidence mean reduced regulatory and political pressure on private firms, including big tech, and an effort to lower the temperature on geopolitical tensions. The political risk premium for investing in Chinese companies is thus a bit lower this year, though it is important to keep in mind that firms and investors will still have to navigate a new normal of tighter regulation and governance than in the period before the tech crackdowns started in late 2020 (more on that below).
In terms of real economic growth, a lot is riding on the behavior of household consumption, which will be the key demand driver. I don’t have a specific call on consumption growth, but the report points out some important headwinds, including the fact that households have seen a hit to income growth during the pandemic and may not be comfortable splurging again until they feel more secure about their financial security. Given that China’s government remains reluctant to provide direct fiscal support to households, it may take a recovery in employment, which will be somewhat gradual, to provide that security.
The emphasis of our call is not that China’s consumption is certain to be weak (again, no strong conviction there). It is that if consumption does disappoint, stimulus is not going to carry the water for overall growth. Neither will property investment (which will likely remain negative if a smaller drag on growth than 2022) or net exports, which was a key support for demand in 2020-22.
A number of data points in the last few days reinforce the themes from the outlook, as highlighted below.
Growth: Conservative GDP growth targets
A key watchpoint for the outlook is the growth target that China’s government sets at the annual National People’s Congress in March, along with the stimulus policies to support that target. My expectation is for a target of “above 5” or perhaps “around 5.5%” (which was the target for 2022); a target of “above 5.5%” or one that aims for at least 6% growth would indicate that China’s leadership is either very confident in the rebound or willing to expend a greater amount of stimulus than I expect to deliver that growth.
Signals over the last two weeks from local governments, which are holding their own annual “two sessions” meetings in advance of the NPC, support the restrained view. 19 of China’s 34 provincial-level governments have already announced their growth targets (see chart below). 13 of the 19 have set growth targets that are lower than their 2022 targets, while three are higher and three basically unchanged. The trend for a slightly lower target is particularly notable thus far among the economic powerhouses: Guangdong, Shandong and Zhejiang all have conservative targets of “above 5%.” The average of 2023 growth targets, weighted by provincial GDP, is 5.7%, compared to 6.3% in 2022 (for simplicity’s sake I am rounding “above 5%” to 5%, etc.).
One shouldn’t blow the lower targets out of proportion. Chinese authorities may also be more realistic after badly missing the 2022 target – real growth for 2022 will come in below 3%, compared to the 5.5% target. Still, it suggests an overall approach of disciplined stimulus.
Regulation: A tighter embrace of the private sector
China’s leadership is signaling that the private sector, including big tech, have less to fear from Beijing – provided that they stay well within the political and regulatory redlines established in the last few years. In other words, there is a reduced risk of sweeping new regulatory actions coming out of the blue this year to hit firms and investors, but there is no going back to the more free-wheeling environment that existed prior to 2020. A tighter embrace from Beijing comes with more direct oversight and runs the risk of becoming suffocating at times.
Among the signals this week:
- The Financial Times reported that China’s government will take “golden shares” in local units of Alibaba and Tencent, as it recently did with ByteDance, the parent company of TikTok. It is not clear yet what practical impact these golden shares would have; in the case of ByteDance, China’s cyberspace administrator (CAC) gained board representation in one of the company’s main units. CAC seems particularly focused on tech companies’ media streaming and online content units, given the political/ideological importance. We’ll have to wait and see what these moves mean in practice, and it may be nuanced. Closer government oversight is a two-edged sword: less risk of regulatory surprises (and even more outright policy support), but more control over decision-making in certain areas.
- The People’s Bank of China said that 14 platform companies, including Ant Group, have completed the “rectification work” of their financial business and are moving into more normalized regulation. That rectification work started in November 2020 with the surprise suspension of Ant’s planned IPO, followed by a wholesale revamping of the regulations for the fintech sector. Regulators recently approved a capital-raising plan for Ant’s consumer finance unit, while Jack Ma has filed paperwork to cede his control over the firm.
- China’s anti-corruption body, the Central Commission for Discipline and Inspection (CCD), held its annual meeting to identify priorities for the year, chaired by Xi Jinping. While the meeting last year contained strong language against the “disorderly expansion of capital” and monopoly power of platform companies, the language was more measured this time. The statement did not mention the private sector or platform companies, though did pledge to prevent “political and business collusion and capital infiltration into the political field” – a warning that private firms should not seek to lobby officials or bend regulation. The targeted sectors for anti-corruption work this year include the financial sector (which has already seen several rounds of investigations) and state-owned enterprises.
Foreign policy: less bark, still some bite
We noted in the outlook that Beijing is lowering the temperature in its diplomacy but that this is more about tone than a shift in policies. In that regard, it is interesting to note that for all of Beijing’s eagerness to reopen, particularly to the business community, it imposed restrictions on the issuance of visas this week to travelers from Japan and South Korea, in retaliation for those countries’ Covid restrictions on travel from China.
I am not surprised that China has not imposed limits on travelers from the US, which would be much more risky for China’s diplomacy and for Western business sentiment.
