China's economy has slowed in growth over the past year. Covid containment measures have slowed down the industry and dampened the consumer sentiment. Even after clear expressions of dissatisfaction with the measures among the population, the government has now largely lifted the restrictions and is once again focusing on promoting economic growth.
The Chinese economy seems to have bottomed out in 2022. The restrictions imposed to combat the rapidly transmissible omicron variant proved costly and ineffective measures. This has resulted in lower productivity and weaker domestic demand. Meanwhile, the weakening of the global economy meant that demand for export goods fell significantly. For these reasons, Chinese economic growth fell well short of the target of 5.5%
Surprising Turn
Nonetheless, Chinese policymakers have surprised the world by opting to reverse the Covid measures and refocused policies on promoting economic growth. Since November 2022 almost all Covid restrictions in China have been lifted. Without mandatory quarantine and excessive testing regulations, the population could finally lead a normal life as before.
During the New Year holidays, people across China celebrated this change, of course. Cinemas, restaurants, hotels and amusement parks were able to look forward to an increased number of visitors. As part of a New Year offensive, groups of Chinese businessmen flew to Europe and Japan to look for additional export opportunities. These trips were paid for by the Chinese government.
Keep Things In Order
The turnaround does not only affect the Covid measures. The Chinese government has promised additional support to prop up jobs and incomes, with the aim of boosting domestic demand. The regulations were abolished that have restricted tech giants, real estate developers and the online education space in the past.
For instance, Didi, a ride-hailing agent, was at the heart of technology regulation. Its app was banned from the major app stores at the time, but is now available again. In addition, the Chinese government plans to improve real estate developers' balance sheets and solve the well-known problem of unfinished buildings.
China Is Moving Back Into The Focus Of Investors
Investors from all over the world approved of the new general conditions. The MSCI® China Index has recovered significantly since November. But the potential of a full reopening has not yet been exhausted. The rapid reopening leads to more infections.
In the short term, the higher incidence is limiting the production and consumption. From the second quarter of 2023, a more rapid rebound in consumer behavior is expected, particularly in the retail and leisure sectors due to gradually built-up immunity. Meanwhile, monetary and fiscal easing should help the Chinese economy return to its growth path more quickly.
In contrast to the major industrialized countries, the inflation rate remains below the 3% target, which allows the Chinese central bank to lower interest rates further if necessary. The latest figures from the US show that inflation is continuing to cool and the labor market remains strong. The likelihood of the global economy escaping a recession is increasing. China's exports could continue to improve as the global economy returns to growth.
In addition, the Chinese government has pushed ahead with several economic reforms in recent years to advance the tech-enabled and low-carbon green economy as sustainable investments become more important globally. Certain areas could prove to be new growth drivers in the future, as evidenced by the rapid growth of China's electric vehicle industry.
Summary
Confidence in the Chinese economy has strengthened again in recent months. Despite the uncertainty caused by the rapidly spreading Covid wave, the prospects for the Chinese economy to reach the growth target again in 2023 are quite promising, even if some political and economic risks for investments in China remain.
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