Uneven recovery ahead for China's economy

(By Caixin journalists Yu Hairong, Cheng Siwei, Fan Qianchan, Wang Liwei and Han Wei)

China's economy appears to be on track for a faster-than-expected recovery, but it may not be felt evenly across the country.

When the government in December abruptly abandoned its "zero-Covid" policy after three years of draconian controls, many feared that an onslaught of outbreaks would lead to prolonged waves of infections in the world's most populous country and further cripple its economy. But signs from the Lunar New Year holiday in the last week of January showed that the worst may have passed.

During the week-long holiday, crowds flocked to Chinese tourist destinations, travelled abroad or visited local cinemas. The number of domestic trips by tourists rose 23.1% from the same period in the previous year while total tourism spending surged 30%, Ministry of Culture and Tourism data show. Movie box office revenue during the holiday jumped more than 11% to 6.76 billion RMB (US$998 million), the highest since the record period in 2021, according to the China Film Administration.

The pace of business activity is picking up. During the week off, manufacturing centers in eastern and southern China launched recruitment campaigns to attract migrant workers to return to factories. On the first working day after the holiday in Chongqing, the industrial hub in the southwest that is now the country's most populous city, 78.6% of workers at major enterprises were back at their jobs, 8.3 percentage points higher than a year earlier, government data show.

The wave of infections that swept across China over the past two months has waned. According to the Chinese Center for Disease Control and Prevention (CDC), the number of hospitalised Covid-19 patients on 23 January plunged 79% from the 5 January peak. The predicted post-holiday surge in hospital admissions never materialised.

CDC chief epidemiologist Wu Zunyou said after the holiday that about 80% of the nation's 1.4 billion people have been infected with the virus, so a major Covid-19 rebound, or a second wave is unlikely in the next two to three months.

Optimism over China's economic outlook is growing. On 30 January, the International Monetary Fund raised its estimate for this year's GDP growth to 5.2% from a 4.4% projection in October, citing a faster-than-expected recovery after reopening. The country's GDP rose 3% in 2022, the first time in over four decades that China's growth fell below the global average amid fallout of pandemic disruptions, a property market crisis and weak overseas demand.

But China's recovery is uneven. The rebound for the service sector still leaves it below pre-pandemic levels. New car purchases are down from a year earlier surge when consumers rushed to take advantage of subsidies before they expired. The housing market remains depressed.

Industries have felt in different ways. Caixin's interviews found while sectors such as new energy and smart manufacturing are upbeat about the recovery, companies in traditional industries especially the small- and medium-sized players are more uncertain about their outlook.

"The adjustment of virus control measures and the rollout of the pro-growth policy will undoubtedly release some pent-up demand and promote growth in the short term," Lu Ting, chief China economist at Nomura, said. Yet investors remain concerned about how pent-up demand and government policy will remain in place to spur growth, Lu said.

In the second half of 2023, China's economic revival will face constraints from an uneven recovery in consumer spending, weak export demand and a sluggish property market, Lu said.

Authorities are eagerly mobilising resources to reboot the economy with policies to support business, spur consumption and encourage investment.

But the effects of the policies remain to be seen and will depend on the response by market participants, analysts said. The most urgent task is to stabilise market expectations, restore confidence and defuse investor concerns about the uncertainties, which will require transparent, fair and predictable law enforcement, said Liu Peilin, a senior expert of policy studies at Zhejiang University.

Policy consistency and guarantee of the rule of law is more important for business than subsidies or other pro-business policies, several company executives interviewed by Caixin said.

The New Year holiday saw a business boom in tourism, catering and movie theater ticket sales as people used their new-found freedom to splurge on recreation.

Official data showed that over 300 million domestic trips were made by Chinese tourists during the holiday week, 88.6% of the trips made during the same period in 2019 before the pandemic hit. Spending on restaurants rose 24.7% to about even with the 2019 level. Box office revenue topped receipts from the pre-pandemic 2019 holiday period by 14.6%.

Left behind in the recovery was consumer spending, especially for big ticket items such as cars and real estate.

Car sales as of 27 January plunged 45% year-on-year partly because the end of government subsidies spurred a rush of purchases at the end of last year that sapped demand in the new year, analysts said.

The housing market remained sluggish as new-home prices in 100 cities continued to drop for a seventh consecutive month in January. The 100 largest Chinese developers by sales sold 354.3 billion RMB of new properties in January, down 32.5% from a year earlier and 48.6% below the December level, according to consultancy China Real Estate Information Corp.

"The overall consumption growth during the Spring Festival holiday was not impressive," China International Capital Corp. said in a research note citing data from the State Administration of Taxation. Consumption-related sectors posted 12.2% year-on-year growth in revenue during the week-long holiday, lower than the 12.5% compound growth rate of the previous three years, according to the administration.

Companies are cautious about the future. An executive for a packing material producer in eastern China's Shandong province said that while pandemic-related drags on the business are mostly a thing of the past, weakening demand from overseas still looms. "It will take three to four months to see" how the business will recover, he said.

You Zhida, chair of Xiamen Richer Plastic Co. Ltd., predicted a reshuffling in the plastic product manufacturing industry this year after a global supply chain shift since 2021. Companies failing to secure new customers will likely be squeezed out of the market, You said.

Recruitment data indicate varied expectations among industries, according to Guo Sheng, CEO of Zhaopin, a leading career platform. After the holiday, industries such as service, new energy, health care and new materials have shown increasing demand for new workers while demand from traditional manufacturing and the internet sector remain weak, Zhaopin data show.

"Although the economy is heading to a recovery, it takes time to see real changes," Guo said.

Many institutions have revised up their projections for China's 2023 economic growth after the reopening. Nomura Securities on 1 February raised its forecast for GDP growth this year to 5.3%, following a previous adjustment to 4.8% from 4% in mid-December. The change reflects China's better-than-expected economic performance in the fourth quarter and fast peak of infections, said the brokerage. Other forecasters including at CICC and Guotai Junan Securities have lifted their growth estimates to as high as 6.2%.

A national growth target will be announced during the annual meeting of top legislators in March. But local authorities released their own goals over the past month that reflect a restrained outlook.

Among China's 31 provincial-level governments, 21 set their 2023 GDP targets below 2022's growth by a range of between 0.5 and 1 percentage point. Only four localities - Hainan, Xinjiang, Chongqing and Heilongjiang - predicted higher growth.

Citic Securities said in a research note that actual growth rates of most localities will likely to surpass those targets because of pro-growth policies and the modest basis of 2022.

Guangdong, Jiangsu, Shandong and Zhejiang - China's four biggest provinces in terms of their economies and export hubs - all set their 2023 targets at around 5%, or below 2022 levels by 0.5 to 1 percentage point. The projections reflect expectations for slowing exports amid weaker overseas demand, said Zhou Junzhi, chief macroeconomy analyst at Minsheng Securities.

Shanghai, China's financial hub, forecasts growth of more than 5.5% this year, following a 0.2% contraction in 2022 because of a months-long citywide lockdown that disrupted businesses. Beijing, the capital city, set a target of over 4.5%.

Research institutions have widely estimated that a national growth target will be set at above 5% this year.

Local authorities have geared up efforts to bolster the economy. On 28 January, the first working day after the holiday break, more than ten provinces held top leadership meetings to map out policy plans for the new year.

Boosting domestic consumption and expanding investment are crucial to local authorities' pro-growth campaigns.

The pandemic curtailed spending by Chinese households as people's income growth slowed. In 2022, retail sales of consumer goods fell 0.2% from the previous year, compared with 8% growth in 2019.

Most Chinese provinces have highlighted consumption in their 2023 government work plans, expecting to spur spending on new energy vehicles, housing improvement, elderly care and other services. Some local authorities planned to invest in new commercial sites to offer more services to the public.

Unlike many countries in the West, the Chinese government did not adopt direct cash handouts to the public to boost consumption. But several local authorities have provided subsidies or consumer coupons to residents. Shanghai, for example, will offer subsidies on purchases of electric vehicles and certain home appliances by the end of June. Heilongjiang is pledging to hand out 600 million RMB of consumer coupons.

The restraint in forecasts reflects lingering concern about a weakening economy and job market, which will require long-term efforts to revive, said Zhong Zhengsheng, chief economist of Ping An Securities. Zhong said he is "cautiously optimistic" about a rebound in consumption this year.

Investment growth also faces challenges as the real estate market continues to founder. In 2022, property investment plunged 10% amid an industrywide crisis, compared with 4.4% growth in 2021. Although governments at all levels took action late last year to arrest the downturn, a recovery in the market hasn't taken hold.

As the property industry remains weak, local governments are likely to step up infrastructure construction to boost investment, Huatai Securities said in a report.

A number of local governments have unveiled investment plans with major projects in transportation, energy, 5G wireless network, electric car charging stations, health care and other public service sectors.

Ping An's Zhong said securing enough funding for their investment plans will be a key test for local authorities.

Entrepreneurs interviewed by Caixin said what they want most is the policy stability. After the volatile years of 2021 and 2022 during which tough regulatory crackdowns hit sectors from property to internet, China's policy pendulum has swung back to a more supportive stance. But whether the policies will be consistent remains a concern of businesses.

Bob Sternfels, global managing partner at McKinsey & Co., told Caixin during a recent trip to Beijing that what foreign investors value more than favorable policies such as subsidies and tax cuts is stability and fair competition in a market.

Since late 2022, the central government has made repeated pro-growth pledges to stabilise market expectations and shore up confidence. The signals have been well received by the market.

Since December, the Purchasing Managers' Index (PMI), a key indicator of business sentiment, has risen for two consecutive months after a protracted downturn in 2022, indicating a rebound in business activity.

Local authorities including Shanghai and Zhejiang have sent strong messages to attract investors by pledging a better business environment and greater transparency.

The pledges are positive, but the market is still waiting for more concrete moves to bring the promise into practice, analysts said.

Xia Yining and Liu Ran contributed to the story.

This article was first published by Caixin Global as "Cover Story: China's Economy Appears Headed for Uneven Rebound". Caixin Global is one of the most respected sources for macroeconomic, financial and business news and information about China.

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