This Chinese New Year pays homage to the rabbit … and the hope is there will at least be bunny hops for the troubled second biggest economy in the world.
The question for 2023 is – how big a recovery should we expect.
History tells us that autocratic leaders can be extremely blinkered, and President, Xi Jinping, has fallen into the trap.
As King Canute failed to turn back the tide, Xi discovered there are some things even he could not command. Therefore, the brutal zero Covid policy, which was strangling business with frequent quarantines, regional lockdowns and massive spending to pay for widespread testing, has finally been ditched. The immediate result has been rampant infection, a rising death rate, and factories, offices and restaurants bereft of workers and customers.
The upside is expected to be a rebound in the economy, with signs apparent from the spring.
Chinese GDP grew by just three per cent in 2022, the second-slowest rate since 1976, the year Mao Zedong died, and well below the government’s target of 5.5 per cent.
While this remains above major rivals, it compares to an average of 7.7 per cent a year in the decade before the pandemic.
Retail sales in China fell 1.8 per cent in December, while exports tumbled 9.9 per cent relative to a year earlier, including nose-dives of 19.5 per cent to the United States and 17.5 per cent to countries in the European Union.
Nevertheless, all is not lost – indeed, far from it.
The reopening of the Chinese economy has buoyed sentiment among economists that the 2023 global growth and inflation picture may be less bleak than initially feared. OECD Secretary-General Mathias Cormann declared it “overwhelmingly positive”.
Standard Chartered chairman José Viñals went a step further. “In the second half of the year, I think that the Chinese economy is going to be on fire and that is going to be very, very important for the rest of the world,” he told CNBC at the World Economic Forum in Davos, Switzerland.
That it does so is crucial. China’s consumers are an almost irreplaceable source of revenue for both home-grown and foreign companies. Its factories produce a greater share of the world’s manufacturing output than the United States, Germany and Japan combined. To revive spending by consumers, China must repair their confidence. However, the government’s index of consumer confidence is at its lowest in more than three decades.
The beleaguered property market, contributing ten per cent to gross domestic product directly, also needs fixing. New housing starts were down 37.8 per cent in the first ten months of 2022. Among China’s top 100 developers, more than 90 per cent are said to be in a distressed situation. Coordinated efforts to support the sector are now underway.
The good news is that inflation is low.
Chetan Sehgal, of Templeton Emerging Markets Investment Trust, told Trustnet he expects corporate earnings to deliver, eventually.
He noted: “Lionel Messi was born in the Year of the Rabbit, and we are hopeful that emerging markets will perform as well as Argentina did during the World Cup.”
Writing for T. Rowe Price Insights, Wenli Zheng, portfolio manager, China Evolution Equity Strategy, said: “With institutional holdings the lowest they have been in five years and valuations far below average, the risk/reward ratio for Chinese equities is favourable.”
A better year for the Chinese market may well mean a better one for the global market.
Let’s just hope that President Xi has learned something from Putin’s debacle in Ukraine and doesn’t go for an invasion of Taiwan. Because then, all bets are off.