China - A reopening rebound is not the same as ‘firing on all cylinders’
Following strong Q1 GDP and activity data, April data shows economy not firing on all cylinders, with headwinds from property, the global growth slowdown and US-China tensions still present. Divergence between improving services/consumption and weakness industry/investment continues.
Last month, we upgraded our 2023 growth forecast from 5.2% to 6.0%, based on a strong Q1 GDP print, an upward revision of qoq growth in Q4-22, and solid activity data for March. Meanwhile, April data came in weaker than expected, showing that the economy is not firing on all cylinders, as the Zero-Covid exit does not mean all headwinds are gone.
Strong Q1 and weak April data point to ongoing divergence, as not all headwinds have gone with Zero-Covid exit
Whereas Q1 GDP growth and activity data generally confirmed the reopening rebound following Zero-Covid exit, April data on balance were disappointing. This seems to have contributed to a weakening in sentiment, with the yuan sliding against the US dollar and China’s stock markets moving down again. In our view, the Zero-Covid exit is a crucial shift in the overall policy stance, but not a panacea for all the challenges China faces. The April data show the divergence between improving services and consumption – profiting the most from the reopening rebound – while weakness in industry and investment continues, with headwinds from the property sector, the global growth slowdown and US-China tensions remaining.
After promising signals in March, the recovery of the property sector lost some steam in April. Housing sales fell back, suggesting pent-up demand is fading. New building starts and property investment remain in contraction territory, although this also reflects a policy of prioritising the completion of existing projects. A more positive note came from the labour market, with the urban jobless rate falling to a 16-month low of 5.2% (although youth unemployment remains high), which should underpin the recovery in household income. Coupled with a gradual recovery in consumer confidence, this should help a further recovery in consumption. Comparisons with the stimulus-fueled consumption boom in the US are misplaced: for China it’s more about a return to normal, as consumption clearly lagged in the pandemic years. Business confidence has improved following Zero-Covid exit, with the composite PMIs and the Cheung Kong index still at relatively high levels.
Policy support to remain targeted and piecemeal, with special attention for the property sector
We expect annual GDP growth to surge in Q2, but that reflects the weak base from a year ago, when China was in a broad Omicron-related lockdown. We expect qoq growth to fade in the course of 2023, following the ‘reopening bonus’ in Q1. On the policy front, we still think that the authorities will refrain from aggressive easing, as they want to limit the rise in leverage and prevent the overheating issues that arose after the rebound from the initial Covid-19 shock in 2020. However, we do not think that the new government team would tolerate another year of disappointing growth. On balance, we expect more piecemeal monetary easing in the form of a further cut in the reserve requirement ratio for banks and mini cuts in policy interest rates, including in the 5-year Loan Prime Rate used as a benchmark in mortgage lending. We also assume further fiscal support targeted at weak spots, including the property sector. Combined with the filtering through of previous easing measures, this should help the turn in the credit cycle to gain momentum, although we still do not expect a “credit bazooka”.