Macroeconomics: China's central challenge

This year China’s recovery from the pandemic has been held back by strict ‘zero-Covid’ lockdowns, power shortages and prolonged property market weakness.

China’s equity markets fell sharply after the National Party Congress announced a new seven-member Politburo Standing Committee that seemed to consolidate authority under President Xi (thus raising concerns about reduced checks and balances amongst China’s leadership), focused more on security issues rather than economic fears and gave no signal China’s strict approach to the virus would be loosened soon.

For China’s economic outlook, however, the central challenge remains when will the government start easing its zero-Covid stance.

Source: Bank of Singapore, Bloomberg.

The economic benefits of shifting away from strict lockdowns are clear. China’s 3Q22 GDP data reported this week beat expectations with the economy expanding 3.9% YoY as closures of Shanghai and other centres in 2Q22 lifted. But the threat of fresh lockdowns continues to weigh on consumer sentiment and thus is keeping growth subdued. The first chart shows China’s 3Q22 GDP expansion at 3.9% YoY remains well below the government’s 2022 target of ‘around 5.5% growth’. The second chart of September’s activity data, also released this week, shows retail sales only grew by 2.5% YoY last month.

Source: Bank of Singapore, Bloomberg.

Lagging consumption is holding back growth. Another weakness is property. September’s industrial production accelerated to 6.3% YoY and September’s fixed asset investment rose 5.9% YoY owing to stronger manufacturing and infrastructure investment. But property investment stayed weak, falling by 8.0% YoY.

This year we expect China’s overall GDP growth rate will remain subdued at 3.0% in 2022 after last year’s strong 8.1% rebound from the pandemic. For 2023 we need to see the government start easing its zero-Covid stance to achieve our forecast for GDP to grow by a more solid 4.5% and thus help financial markets recover this year’s losses.

This article was first published by Bank of Singapore on October 4, 2022. The Opinions expressed in this publication are those of the authors. They do not purport to reflect the opinions or views of Bank OCBC NISP Private Banking Tbk. or its affiliates.

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