Liu He, currently China’s fifth vice premier, gave an update on the Chinese economy at the World Economic Forum in Davos. He said the country's economy, which has reached 3% growth by 2022, would improve significantly this year and return to its normal trend. He also reiterated the country's support for economic multilateralism.
His speech resonated with many business leaders and global economists who see China as the growth driver needed to avoid a widely predicted global recession.
Will China’s covid reopening be the major event of 2023 and a key driver of growth? This is the question many analysts are asking.
Equity market rally
For Catherine Yeung, investment director Asia-Pacific equities at Fidelity International, political decisions in recent weeks have put many people off. However, in the face of increased government control, she believes that the agility of Chinese entrepreneurs will drive the economy.
Focusing on the markets, she notes that while equities in the Middle Kingdom have lagged for most of 2022, there has been a significant rally since the end of the year. “Over one year, the fall is 21.8%; over six months, it’s 11.9% and over three months, we have a 13.5% rise.”
She attributes the rebound to the good performance of an economy that is “one cycle ahead of the rest of the world.” Inflation is stable at 2.8%; the unemployment rate is at 5.7%--“a level that is all the more remarkable given that the zero-covid policy has weighed on employer confidence”--and the central bank’s interest rates remain at 2%. The ratio of property debt to GDP is 62.1%. This compares with 89.8% in the UK and 76% in the US.
Consumption and savings to the rescue of growth
After a few years of sluggishness, will 2023 mark a stock market boom? Yeung thinks so. “Earnings expectations have rebounded from an extremely bearish level,” she notes. And where will market growth come from? She believes that if growth is the policy objective, “consumption will be the means.”
In fact, it is the primary driver. The outlook for consumption is driven primarily by a return of consumer confidence. “At 49%, consumer confidence is on average three times higher than in developed countries.” Chinese households also have substantial cash reserves.
Yeung rules out the scenario of a property crisis that could slow down consumption. She believes that the sector is deleveraging and that the government is adopting an accommodating policy to limit the risk. There is still a lot to be done, but the situation is under control. She notes that consumer habits are changing and “local” brands are gaining market share.
The second source of market growth will be the development of a domestic investor class attracted by “professionally managed products.” The emergence of a “private” pension pillar will provide many investment opportunities.