The Year of the Tiger was not kind to China. Market hopes that the Chinese economy would continue its 2021 recovery trend were dampened by a strict ‘zero-COVID’ policy characterised by mass testing, border quarantine, and reoccurring lockdowns. The result was GDP growth of ~3% y-o-y which marked the lowest increase since 1976 (excluding the 2020 pandemic year) and was well below Beijing’s 5.5% target.

No sector was hit harder than the property sector. Real estate investment fell by 10% y-o-y, underpinned by a property crisis that saw prices fall by more than 25% in US dollar terms. Property prices fell for eight consecutive months, owing to both a lack of demand and government restrictions on excessive borrowing by developers.

Other parts of the economy also had a year to forget by Chinese standards. Industrial production growth fell back (output rose 3.6% y-o-y) while retail sales fell 0.2% y-o-y. On a more positive note, fixed asset investment increased 5.5% y-o-y and exports increased 7.7% y-o-y, although a drop in Chinese exports in Q4 suggests that tough times may be ahead.

The end of the year saw an unexpected turnaround in the country’s ‘zero-COVID’ policy, triggering hopes for a domestic consumption recovery. China is also planning to relax restrictions on property developer financing by easing the so-called “three red lines” policy, a metric putting caps on debt-to-cash, debt-to-asset and debt-to-equity ratios. The property market accounts for about 25-30% of China’s GDP and represents a key economic, political, and social benchmark. With weak demand constraining inflation, the People’s Bank of China (China’s Central Bank) loosened its monetary policy in 2022, cutting the one-year loan prime rate to 3.65%.

Project Blue believes that Beijing will aim to revive its economy in 2023 through domestic demand, aware that the global economic environment will be challenging for months to come (implying that too much reliance on exports is to be cautioned against). We expect a rebound in domestic consumption over the coming months with an improvement in the property market later in the year. We expect a rebound in trend, if not magnitude, similar to 2021 when GDP rose 8.1% and retail sales 12.5%.

In this context, Project Blue believes that the current 2023 GDP growth consensus of 4.5% is too conservative and that a 5-5.25% range is more realistic. The main exogenous downside risks are geopolitics, a rebound of the pandemic and rising inflation in the second part of the year which could cause the PBOC to tighten its monetary policy.

There are also structural internal downside risks. While Beijing may wish to rebalance China’s economy towards consumer-based growth, the process will be challenging. China’s economy has grown remarkably over the past two decades but there remains a limited social safety net which translates into unusually high national savings rates as households keep money back for retirement, healthcare, and education. Unlocking a consumption boom may therefore require significant policy action. Demographics also pose a challenge, with the country posting its first decrease in population in sixty years in 2022. China needs to create a credible pension scheme and other safety nets for its ageing population if it wants to move successfully from an economy driven by investments to domestic consumption.

As ever, the world will watch China closely in 2023. Let’s hope the Water Rabbit will bring peace and prosperity to China and to the world this year.

Gong Xi Fa Cai!

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