Women work at a factory producing inflatable Grinch toys for export at a factory in Huaibei, in China’s eastern Anhui province, on February 15. The official manufacturing sector’s PMI hit 52.6 in February. Photo: AFP
Opinion
Macroscope
by David Brown
Macroscope
by David Brown
China’s economy could easily defy the naysayers this year
In a repetition of 2021, when the economy boomed in the wake of the 2020 Covid-19 crisis, China could surprise on the upside this year after the lifting of zero-Covid restrictions
If growth hits 6 per cent, China’s markets could see stellar stock performance
The world is still facing major challenges but are forecasters being too downbeat on China’s growth potential in 2023? The strongest reading in China’s manufacturing business confidence in over a decade suggests that mainland factories are booming again post-lockdown as the economy catches up with pent-up demand, not just domestically but from abroad too.
In a repetition of 2021, when the economy boomed in the wake of the 2020 Covid-19 crisis, China could easily surprise on the upside this year after the lifting of zero-Covid restrictions, with growth likely to exceed even Beijing’s modest 5 per cent target for 2023.
The chances of reaching 6 per cent growth could even be on the cards. If that’s the case, China markets could see some stellar stock performance this year.
The official manufacturing sector’s purchasing managers’ index (PMI) from the National Bureau of Statistics in February came through at an extremely strong 52.6, a potential game changer for expectations on where the economy might be heading this year.
It’s a big leap from January’s 50.1 reading, well above the 50 boom-bust mark – the dividing line between growth and contraction in the manufacturing sector – and the strongest level of activity indicated since April 2012. It’s not an isolated case either as other business confidence indicators are showing similar profiles of sharp recovery.
The private-sector Caixin China manufacturing PMI grew by 2.4 points to 51.6 in February while the Caixin service-sector PMI rose to 55, its highest level since August last year.
Service-sector companies are enjoying steeper increases in business activity, employment demand is expanding at its quickest rate since November 2020, while inflationary pressures remain muted. Clearly, the economy opening up again and confidence moving back onto a positive footing is setting the agenda for a faster rate of mainland recovery as domestic demand picks up steam.
With the economy stuck in the doldrums last year due to lockdowns, it’s no wonder China’s 2022 growth rate came in as low as 3 per cent, leaving some economy watchers cautious about the outlook for growth. The World Bank projected that 2023 growth could be as low as 4.3 per cent.
Of course, the economy has been swimming against the tide, overshadowed by a gloomy global picture, weak consumer confidence following the zero-Covid restrictions and exports contracting at a fairly fast annual pace in recent months. But as business activity builds better momentum, and as labour conditions improve and consumer spending intentions recover, the upturn should begin to spread into other areas of the economy.
Consumer confidence has generally been on the ropes over the last year, due to Covid-19 restrictions and weakness in the housing market but tentative signs of recovery are in the air.
China’s official consumer confidence index collapsed from 121.5 in January 2022 to a low of 85.5 in November, but there have been signs of recent progress with the index rallying to 88.3 in December as the government began lifting Covid-19 restrictions. Consumer optimism should have rallied even more in the last few months with the economy getting back onto a normal footing.
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China's slow road to economic recovery after dropping its zero-Covid policies
China's slow road to economic recovery after dropping its zero-Covid policies
The government has deliberately kept policy conditions loose and supportive for growth, through easy money and lax fiscal policies which should continue over the medium term even as the outlook improves. With domestic inflation pressures still relatively subdued, the door remains open for more interest rate easing and cuts in the banks’ reserve ratio requirement to keep borrowing costs down, boost consumer spending and support the housing market.
Increased deficit spending increased the government’s budget shortfall to 7.4 per cent of gross domestic product in 2022, below 2020’s record 8.6 per cent deficit-to-GDP ratio, a vital part of Beijing’s drive for faster growth and unlikely to change soon.
If there is a recent precedent for how quickly the economy might respond in 2023, it’s probably the recovery in growth as China emerged from the 2020 Covid-19 crisis. As pent-up demand came back on stream, China’s growth rate surged from 2.2 per cent in 2020 to 8.1 per cent in 2021. The volatility swing might not be so great this year but, with economic confidence rising, 6 per cent growth should be easily achievable this year.
If the mainland growth rate beats expectations, China could lead the way to global recovery in 2023, setting its equity markets up for a major rally in the process.
David Brown is the chief executive of New View Economics
