HomeOtherOutlook 2023: A year of hope for the Chinese economy?

Outlook 2023: A year of hope for the Chinese economy?

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With the establishment of “steady growth” at the Central Economic Work Conference and the relaxation of epidemic control, China’s economic outlook for 2023 also shows a significant improvement. For the Chinese economy, 2023 is not only a year of succession, but also a year full of hope. From the baseline scenario, we expect China’s economy to bottom out in the first quarter of 2023 and continue to grow from the second quarter of 2023. Under the baseline scenario, China’s economic growth rate will increase from 3.1% in 2022 to 4.8% in 2023, while under the optimistic scenario, China’s economic growth rate may exceed 6% this year.

Consumption returns to the C position

Although our GDP forecast is close to the market consensus, our forecast for total retail sales of consumer goods reaches 6.8%, which is much higher than the market median of 6.3%. In the context of weak exports, the domestic market will become the main engine of China’s economic growth, which means that consumption will once again lead the economic performance after the epidemic.

The main driving force to push consumption back to the C position comes from the adjustment of the epidemic control policy. Referring to the experience of other countries in dealing with the epidemic before, China’s reopening process faces challenges, but it can help the economy reduce uncertainties in the medium and long term. Since the outbreak of the epidemic, China’s consumption has been relatively sluggish, and the retail sales index of social consumer goods is far below the pre-epidemic level. However, judging from the experience of overseas markets, the relaxation of epidemic control will provide the soil for consumption to recover. For consumption, the importance of normalizing economic activity is self-evident.

The relatively high savings rate of residents will provide support for consumption growth in the post-epidemic era. Over the past few years, there has been an obvious scissors gap between household deposits and loans, that is, while deposits have increased, loans have declined, which means that the household savings rate has passively increased. On the one hand, the rising savings rate means that households are reducing consumption, and on the other hand, it corresponds to the downward cycle of real estate. Generally speaking, it means that Chinese households have experienced a rare “deleveraging”. From this perspective, the residential sector can provide growth momentum for the economy, but only stable economic growth can support the residential sector to maintain a relatively long-lasting consumption power after “increasing leverage”.

Therefore, expanding domestic demand is not an expedient measure. The Central Economic Conference emphasized that “the recovery and expansion of consumption should be given priority”, which means that in the short term, consumption has been brought to a more core position. On December 14, the “Strategic Planning Outline for Expanding Domestic Demand (2022-2035)” was released and put forward higher requirements for medium and long-term consumption, which means that a complete domestic demand system has become China’s medium-term growth goal and demand.

Untie the “policy knot” of real estate

For overseas investors, real estate is another “policy knot” that needs to be untied. Prior to this, the capital chain of real estate development enterprises has been in a tense state of operation. On the one hand, real estate sales continued to decline; on the other hand, it became increasingly difficult for real estate developers to refinance their debts. Real estate developers, especially private enterprises, have tight cash flow and even defaulted on their debts.

However, the “three arrows” of the real estate industry have significantly reversed the confidence of the market. The so-called “three arrows” are to support private enterprises to broaden their financing channels from the three main financing channels of bonds, credit and equity. On November 8, the China Interbank Market Dealers Association shot the “second arrow” to postpone and expand private enterprise bond financing support tools, which are expected to provide about 250 billion yuan in private enterprise bond financing. On November 23, the People’s Bank of China and the China Banking and Insurance Regulatory Commission officially issued the “Notice on Doing a Good Job in the Current Financial Support for the Stable and Healthy Development of the Real Estate Market”, which ensured that 16 items in the media reports on November 11 about supporting the healthy and stable development of the real estate market implementation of measures (“first arrows”). On November 28, the China Securities Regulatory Commission issued five measures to adjust and optimize real estate equity financing, announcing the official landing of the “third arrow”.

Needless to say, the combination of the “three arrows” is the strongest signal of official Chinese support for the real estate market since the “930 Policy” in 2014, and this round of policies also implies that the financial pressure on developers is expected to be fully resolved. From a macro perspective, the resolution of the developer’s credit crisis is conducive to stabilizing the “lower limit” of the financial system. It is worth mentioning that on December 16, Liu He stated that real estate is a pillar industry of the national economy, and the balance sheet of the industry needs to continue to be improved. The mention of the “pillar” status of the real estate market has a turning point for investor confidence.

Although the current real estate market sales are still weak, the “three arrows” will improve the balance sheets of real estate developers, leaving room for them to wait for the recovery of the economy and the real estate market in the coming year. In the medium and long term, the aging of China’s population is accelerating, and the demand in the real estate market may stagnate or even decline. But as long as there are relevant policies to guide, the real estate market will still achieve a dynamic balance between supply and demand. In general, the “deleveraging” of the real estate market will be more moderate in the future, and the pricing of related assets will be more pragmatic.

In addition to the real estate industry, Chinese officials have set the tone for private enterprises and the “platform economy”, which has increased investors’ expectations for the future economy to a greater extent. The Central Working Economic Conference clearly stated that state-owned and private enterprises should be treated equally, and with the normalization of supervision, the state supports the platform economy to continue to play a role in promoting economic development, creating jobs, and actively participating in international competition. From the perspective of these two policies, the “policy knot” of overseas investors is also being gradually untied.

How to increase total factor productivity?

The economic growth target for the new year will be announced during the “Two Sessions” in March 2023. Although it seems too early to make an exact forecast, we think the figure will be around 5%. Since the growth target for 2022 is 5.5%, from the perspective of stabilizing market expectations, moderately lowering the economic growth rate is a more reasonable policy choice. In order to promote economic growth, fiscal policy will also be more active. We expect the fiscal deficit rate to be raised to 3% of GDP in 2023, higher than 2.8% in 2022.

“High-quality development” will become a more important main line of economic development, and one of its cores is to increase total factor productivity. Several studies have shown that since the global financial crisis in 2008, China’s total factor productivity has continued to decline. At the same time, investment has become the main engine of economic growth. In order to achieve growth goals, local governments tend to increase investment in infrastructure, but due to the overall low efficiency of many investment projects, they cannot maintain long-term stable cash flow. Therefore, although it can promote high economic growth in the short term, it brings troubles for long-term growth.

Around “high-quality development”. Driving the core industry is the key. Many international studies have shown that compared with the service industry, the manufacturing industry is more able to drive the improvement of total factor productivity. Therefore, the development of high-tech industries, manufacturing industries with core competitiveness, and related industrial chains is the core of future economic improvement. For 2023, a year that connects the past and ushers in the future, paying attention to relevant industries and the interpretation of policies is the proper meaning of planning mid-term investment.

For the exchange rate, the future trend of the RMB can be measured from two aspects: growth and interest rate differentials. Technically speaking, after several rounds of games in the last few quarters, 6.80-7.15 will become the main trading range of the USD/RMB exchange rate. In the next 1-2 quarters, the improvement of economic growth prospects will promote the strengthening of RMB. However, considering that the U.S. dollar interest rate is likely to remain high in the next 2-3 years, and China’s overall interest rate level has limited upward space, the U.S. dollar-renminbi exchange rate is likely to fluctuate, so it is difficult for the renminbi to get out of the unilateral market in the medium term.

Note: This article only represents the author’s personal views

This article is edited by Xu Jin WeChat xujinft

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