With China’s upcoming Central Economic Work Conference (CEWC), markets will be looking for any pro-growth signals after a year of turbulence. But the most consequential action for growth has already happened: the decision to abandon Zero Covid.
The key questions now are
1. will the Zero Covid exit endure?
2. how much will property rebound?
3. will there be more significant stimulus?
Here we briefly unpack our views on these three questions.
Although 4Q growth will still come in around expectations in our recent outlook, we underestimated the degree to which an about-face on Zero Covid would occur. One of the key factors is that the pre-Party Congress politics on Zero Covid have evaporated, making it much easier to shift course. Combined with bottom-up demands and an economy in dire straits, those advocating an exit have won. At this point, we expect China to embark on a swift exit and reach near full opening by the end of 1H2023.
If anything, the concern now is whether China is exiting hastily without much planning for case surges and ensuring sufficient hospital capacity. To be sure, the path from containment to coexistence will be paved with its share of chaos and setbacks, but we believe that China has passed the point of no return and is decisively moving to coexistence.
Fast-moving developments in the Chinese capital bear monitoring as a leading indicator. That’s because what happens in Beijing won’t stay in Beijing—that is, with the Chinese capital already confronting a bad surge, the government’s acceptance of case spread without reversing course will send a strong signal across the country for emulating the approach. At this point, even with infections mounting, we believe the government is unlikely to tighten controls again and will hold the line on reopening.
The property sector’s prospects have improved as of late because state banks have been quietly lending to property developers without resorting to a formal splashy bailout. But there is strong reluctance behind these actions, as the central government is serious about reducing banks’ exposure to the property sector and maintaining its fiscal prudence.
So Beijing will want to shift the burden of the property rescue from the state to households as soon as possible. And the Covid exit presents as good an opportunity as any for Beijing to seize on to unleash more household spending. We expect announcements on stimulating property demand during the CEWC, including measures such as reducing down payment and mortgage rates.
Skepticism on whether demand-side stimulus will work is warranted, since incentives for property purchases have been largely unsuccessful to date as sales declined by more than 20% through October. But at the same time, Chinese households have accumulated 6 trillion yuan (~$1 trillion) in excess savings this year, largely as a result of not buying homes. That pent-up demand is more likely to materialize this time because the Covid exit will lead households to reconsider their outlook as the economy reopens.
With households more willing to take on debt and resume property purchases, that will also improve the cash flow of property developers that depend on sales. That will lead the state sector to withdraw its lending once the sector appears more stable.
While the Zero Covid exit and a potential property rebound are looking up, there remains the risk that stimulus will be withdrawn too quickly. While we believe that the on-budget fiscal deficit will modestly increase in 2023, the overall macroeconomic policy stance will likely be contractionary.
For one, any increase in the fiscal deficit will not be able to offset the ending of other stimulus measures such as the tax refund and the central bank’s dividend payments—together accounting for 3% of GDP in 2021. Second, the latest Politburo meeting once again puts financial risk as a top concern for 2023, effectively ruling out broad-based monetary easing.
The bottom line is that the move to Covid coexistence will be the biggest boon to growth in at least two years, even as a weaker stimulus will be a headwind to growth in 2023. We will have more detailed analysis of China’s economic prospects in our 1Q2023 Macro Outlook.
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