Our forecast for China this year is ahead of consensus and is bullish. We do not believe that the good performance of the Chinese economy will be fully appreciated during 2023.
Contrary to poor forecasts for developed markets, the Chinese economy is rebounding rapidly after a prolonged shutdown due to the pandemic, as confirmed by a strong first-quarter GDP. Unlike developed markets, Chinese monetary policy is expansionary and is likely to remain so: interest rates are low and there may be room to lower them.
During the long lockdown period, government financial support was limited, which is why China no longer has the problem of inflation. The job market is also weak, with youth unemployment as high as 18% in some urban areas. While this is not an extraordinary figure, it means less wage inflation than the United States, the United Kingdom, and other markets.
During the Covid period, China’s wealthiest households accumulated additional savings, so the urge to spend and travel both at home and abroad is strong. Traffic and metro travel have increased significantly in the largest cities and the holiday market is booming. In 2019, Chinese tourists spent $250 billion at home and abroad, so the return of Chinese tourists would be positive for many other economies.
Prime Minister Xi Jinping is targeting 5% GDP growth with services driving this expansion. Retail sales and service business survey data have been strong, confirming a consumer-led rebound. The non-manufacturing survey may be slightly below consensus (56.4 versus 57 expected), but it is still a very high level, indicating that services will provide a good base for GDP growth in Q2.
The manufacturing sub-index also fell but stood at 63.9, the second highest reading since October 2018, in line with policy support. Furthermore, policy makers continue to maintain a supportive tone, saying that “domestic momentum is not strong and demand remains insufficient.” Therefore, it minimizes the risk of premature withdrawal of the procedure and may also stimulate some additional remission.
The return of the expression “housing is for living, not for speculation” in official releases is a reminder that authorities are wary of losing the progress made in reducing the risk of real estate developers.
All of these factors are expected to boost China’s growth more than expected by other economic forecasts. This means that investors should be able to find solid opportunities that are still well priced.