Our forecast for the year ahead in China is above-consensus and bullish. We don’t think it’s fully appreciated how well the Chinese economy is going to do over the course of 2023. The abrdn Research Institute has recently raised its forecast for real GDP growth from 2.9% in 2022 to 6.0% in 2023.
In contrast to the downbeat forecasts for developed markets, the Chinese economy is rapidly re-bounding after the long Covid lockdowns, as confirmed by the strength of Q1 GDP. In further contrast to developed markets, monetary policy in China is expansionary and likely to stay that way – interest rates are low and there may be scope to move them lower.
During the long lockdowns, there was limited financial support from the government, which is one reason why inflation is now not a problem in China. The labor market is also slack, with 18% youth unemployment in some urban areas. While that’s not great, it means that there is less wage inflation than in the US, UK, and other markets.
Over the Covid period, wealthier Chinese households built up an excess in savings, so now there is a pent-up desire to spend and to travel, both domestically and internationally. Traffic in the biggest cities and subway travel are up significantly and the holiday market is recovering. In 2019, Chinese tourists spent $250bn both domestically and overseas, so the return of the Chinese tourist will be positive for many other economies.
Premier Xi Jinping is targeting a 5% growth in GDP and services are driving this growth. Retail sales and services business survey data have been strong, confirming the consumption-driven rebound. The non-manufacturing survey may have been slightly below consensus — at 56.4 versus the 57 expected — but this is still a very high level, indicating that services will provide a good base for GDP growth in the second quarter.
The construction sub-index also fell, but, at 63.9, it remains at the second-highest reading since October 2018, consistent with the front-loading of policy support. In addition, policymakers continue to strike a supportive tone, stating that “internal dynamism is not strong, and demand is still insufficient”. So, this reduces the risk that the policy will be withdrawn prematurely and could even spur some further minor easing.
The return of “housing is for living, not for speculation” within official communications is a reminder that the authorities are wary of losing progress made on de-risking real estate developers.
All of these factors are expected to boost China’s growth by more than may have been anticipated by other economic forecasts. This means that investors should be able to find strong opportunities that are still well-priced.