Prospects for the Chinese economy have improved markedly since December and there are good reasons to expect China to outperform expectations this year.
There have been two important developments in the past couple of months in China. One is that the Chinese authorities relaxed Covid-19 restrictions. The second is that although there have been infections, they are not on a scale to undermine consumer confidence.
Not surprisingly, the economy is showing signs of improvement. The government’s data on spending during the recent Spring Festival shows a major uplift since last year with holiday spending 30% higher than in 2022. The retail, catering and domestic travel sectors have benefitted with the number of domestic trips rising by 23% to 308 million this year over last year.
Upbeat indicators
The purchasing manager indices for January – a good proxy for the overall economy – showed a decisive recovery under way, particularly in the services sector, which is the biggest employer in the country. Forward-looking indicators are upbeat: order books are filling up and business confidence is growing. The government has also made it clear that more support is coming. Prime Minister Li Keqiang has vowed to boost consumer spending and measures have been taken to help stabilise the property sector and provide credit to small businesses.
There are several channels through which a revived Chinese economy can benefit other economies – both regionally and further afield.
Prices for raw materials such as copper have already risen in anticipation of growing Chinese demand
For a start, Chinese imports are likely to grow faster. Apart from raw materials, the country’s demand for intermediate goods of all kinds is also likely to rebound – to the benefit of its neighbours in East and South-East Asia. A recovery in Chinese capital spending is likely later in the year, which should benefit exporters in Germany and Japan.
Prices for raw materials such as copper have already risen in anticipation of growing Chinese demand. Prices of key commodities for the Chinese economy – base metals, energy and rubber – are likely to go up further once markets see that China’s recovery is likely to be sustained.
Confidence boost
Greater confidence in China’s economy should also stabilise the Chinese yuan. That in turn will help Asian currencies, which came under some pressure when the yuan weakened in 2022. Overall, global businesses will welcome the fact that economic risks in China have diminished – and that should result in more capital spending over time.
The International Monetary Fund recently projected economic growth of 5.2% this year for China
Outbound tourism from China may take some time to recover. Surveys show that many Chinese are still wary of travelling abroad, although this may change during the second half of 2023. Thailand will be a beneficiary of the return of Chinese tourists.
Could there be higher inflationary pressures as China’s recovery adds to demand and raises energy and commodity prices? That’s doubtful. China accounts for around 18% of world output, so a 2 percentage point upturn in Chinese GDP, for example, would add only around 0.3 percentage points to global demand – nice to have and not so large as to create a demand-supply imbalance that sparks more global inflation.
One area of concern is demographics. For example, the recent census showed that China’s population is falling and the country ageing faster than expected. But this is a long-term issue, not one with imminent consequences. With the right policy measures, productivity growth can be boosted sufficiently to allow decent economic growth of around 4% to continue for an extended period.
What all this adds up to is an economy that should grow much faster this year. The International Monetary Fund recently projected economic growth of 5.2% this year for China, after just 3% in 2022 and Asian economies are likely to emerge as the major beneficiaries from this turnaround.
