Chartin Focus: China’s major economic forecasts
Theyear ahead for the Chinese economy is a year of hope. With recent policychanges on Covid rules and the property sector, concerns looming over investorshave been alleviated somewhat. We expect solid improvement in fundamentals andthe Chinese economy is likely to bottom out in the first quarter of 2023 andpick up from the second quarter of 2023 onwards.
Domesticfronts are set to be the main engine of growth. Consumption is likely to seemeaningful and sustainable recovery. Meanwhile, the fired "threearrows" will support the housing market to transition through a moreorderly adjustment with mild deleveraging, thus investors can find a new andmore pragmatic approach in pricing in property-related assets.
Theeconomy has regained priority on the policy agenda. A growth target of around5% for 2023 looks the most likely scenario from the perspective ofpolicymakers, while an increase in fiscal deficit from 2.8% in 2022 to around3% is the baseline scenario in our view.
Weforecast growth of China’s economy to pick up to 4.8% YoY in 2023, up from 3.1%in 2022 on the back of low base effect and supportive policies. We expect thePBoC to lower policy rates, i.e. MLF rates, by 10 bps in the first half of2023. CPI inflation will remain benign and we expect whole-year CPI inflationto increase 1.6% YoY, from 1.9% in 2022.
Interms of CNY outlook, the range of 6.80-7.15 is the new central range forUSD-CNY. Over the short term, growth and policy enthusiasm are likely to driveUSD-CNY lower; however, the interest rate disadvantages could lift USD-CNY.Hence, we see a stable currency to be the key theme for USD-CNY over the comingyear.
01
Whatcan we expect in 2023?
Theyear ahead for the Chinese economy is a year of hope. There are two parts thatthe market will pay special attention to: First, how will China weather throughthe Covid reopening process? And the second question is: Has the propertysector bottomed out?
Thesetwo questions have been the key issues concerning global investors over thepast few quarters or even years. However, the recent policy changes appear topoint to some positive moves, which have not only boosted market sentiment, butalso pointed to a solid improvement in economic fundamentals. By and large, webelieve that the Chinese economy is likely to bottom out in the first quarterof 2023 and pick up from the second quarter of 2023 onwards. For the whole yearof 2023, our baseline scenario is that the Chinese economy will grow 4.8% y/y,up from around 3.1% in 2022.
02
Domesticfronts are set to steer the ship
Thesource of growth will mainly be from domestic fronts. In the first place, we thinkthat the gradual reopening will be critical for consumption to catch up overtime. The rapid deceleration in exports also means China needs to tap intodomestic markets for growth over the foreseeable future.
Whilethe reopening process is unlikely to be a smooth journey, according toexperience in many countries, it will reduce one of the biggest uncertaintiesfacing the Chinese economy, particularly for domestic consumption. Since theoutbreak of the Covid pandemic, consumption in China has been underperformingdue to Covid restrictions, with retail sales index well below the pre-pandemictrend in the past few years. As such, with the easing of Covid restrictions,consumption is likely to see meaningful and sustainable recovery from nextyear.
Risingrates of household savings, as represented by the gap between householddeposits and loans, suggests that consumption is likely to be supported ifconsumer sentiment improves. In the meantime, the decline in household loansalso reflects the weakening property market, which points to another key issuefor the Chinese economy.
03
"Threearrows" fired to rescue the
housing market
For theproperty market, concerns are mostly on the funding side. One issue is thathome sales remain sluggish, and another issue is that it is becoming increasinglydifficult for property developers to obtain debt refinancing. Both haveexasperated cash flows for developers and even triggered defaults, particularlyamong privately owned developers.
Theso-called three arrows have significantly changed the picture for the housingmarket outlook over the coming year. On 8 November, the National Association ofFinancial Market Institutional Investors (NAFMII) extended the bond financingsupport program for private developers, the "second arrow", with financialaid totaling RMB50 bn. On 23 November, the People's Bank of China (PBoC) andChina Banking and Insurance Regulatory Commission (CBIRC) published on theirofficial websites an official 16-point rescue plan to support the healthy andstable development of the property market. The announcement confirms thepolicies mentioned in media reports on 11 November (so-called the "firstarrow"). On 28 November, the "third arrow", a 5-point rescueplan on reopening equity financing channels for property developers finally cameout. We believe that this time, the financial regulators have demonstrated thestrongest support level for the property market since the "930policy" in 2014. We see this round of policy relaxation as a strong signalof all-round fund easing for developers.
Whileoverall housing sales remain soft for now, it is important that developers'balance sheets improve, resulting in some time to wait for the overall economyand property market to rebound. For the year of 2023, the property market willbe a key sector to watch – from a medium- to long-term perspective, the housingmarket is likely to experience consolidation or even retreat due to China’srapidly aging population. However, with proper policy support, it also makessense to expect a more orderly adjustment, not only on demand-supply dynamics,but also on developers’ credit issues. Put simply, the deleveraging in theproperty market should be relatively mild going forward, and investors willalso find a new and more pragmatic approach in pricing in property-relatedassets.
04
5%likely the growth target for 2023
Certainly,the economy has regained priority on the policy agenda, which was the keymessage delivered by the latest Politburo meeting. Against this policybackdrop, we think that economic policy will focus on domestic demand – withreopening to help consumption and job markets, and financing policies tosupport the housing market. This brings in the growth target for the year of2023. The closely watched growth target will only be unveiled in the NationalPeople’s Congress (NPC) next March. It is still too early to predict an exactnumber or a range, for now; nonetheless, it is unlikely to deviate too muchfrom 5%, as history suggests China tends to maintain a relatively stable growthtarget to manage market expectations. As the growth target for 2022 was 5.5%, a2023 target at around 5% is likely if history is any guide.
Therehas been long discussions on whether China still needs a specific growthtarget, given the authorities’ ongoing emphasis on "high-qualitydevelopment" (高质量发展), which requires significant improvement intotal-factor productivity (TFP). Various studies suggest that China’s TFP hasbeen diminishing over time, particularly after the global financial crisis in2008. In the meantime, investment has been in the driver’s seat – underpressure to achieve growth targets, local governments have ramped upinfrastructure investment, which has led to relatively high growth, but coulddampen long-term productivity as many investment projects are inefficient aslong-term cash-flows are not justified.
However, China’s 2035 target of"Achieving Socialist Modernization Basically" (基本建成社会主义现代化国家), implies that China wantsto double its GDP from 2020 to 2035. As such, a growth target is still neededto benchmark the progress of economic performance. All told, a growth targetaround 5% for 2023 looks the most likely scenario from the perspective ofpolicymakers. An increase in fiscal deficit from 2.8% in 2022 to around 3% isalso the baseline scenario in our view, as China vows to adapt a proactivefiscal policy to support the economy amid weakening external demand. A certainamount of leveraging up from the government can be expected, against thebackdrop of overall global and economic conditions.
05
Ouroutlook on key macro forecasts for 2023
Towrap up, we think that China’s economic growth will pick up to 4.8% YoY for2023, up from 3.1% in 2022 on the back of a low base effect and supportivepolicies. We see the PBoC lowering policy rates, i.e. the MLF rates, by 10 bpsin the first half of 2023. CPI inflation will remain benign and we expectwhole-year CPI inflation to increase 1.6% YoY, from 1.9% for 2022.
TheCNY outlook can be framed in terms of growth and policy outlook. Technicallyspeaking, the range of 6.80-7.15 is the new central range for USD-CNY followingthe frenetic trading in the past few quarters. Over the coming year, growth andpolicy enthusiasm are likely to drive USD-CNY lower; however, the interest ratedisadvantages could lift USD-CNY, particularly as overall sentiment weakens.Hence, we see a stable currency to be the key theme for USD-CNY over the comingyear.
… with special thanks to Dr. Chen Qiuyu for hercontribution.
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