Looking forward, we expect to see a sustained economic recovery in China in 2023 as a result of the reopening and policy stimulus.
Global Market Strategist
- After the full relaxation of pandemic control measures in China, COVID-19 infections might have peaked in major cities in late December.
- Chinese economy decelerated through the last quarter of 2022, being disrupted by zero-COVID policy in October and November, and then slowed acutely in December amid the sharp pick up in infection.
- That said, economic activities are rebounding quickly as the infection peak has passed, and sustained growth momentum is expected in the upcoming months, which should support investor sentiment and market performance.
Since late November, China has dramatically shifted from stringent zero-COVID policy toward full-scale reopening. The rapid removal of mobility control has caused a spread of Omicron strains across the country. A month and a half into reopening, most provinces and cities have now passed the first wave of infections, and economic activities are recovering based on high frequency transportation data.
With the lack of official statistics on infections, analysts are tracking the pandemic trend using various big data tools. Key word search indices from Baidu, a search engine, showed that COVID-19 infections might have peaked in major cities in late December (Exhibit 1). Using big data analytics and questionnaire surveys, a research team from Beijing University claimed that infections peaked in most regions before December 20, 2022. They also estimated 900 million or 64% of the Chinese population have already been infected as of January 11, 2023.
The only official infection data was released on January 9 by Henan Province, which announced that 89% of its population (urban: 89.1% vs. rural: 88.9%) had been infected as of January 6, 2023. Located in the very center of China, Henan is the third most populous province, with 94 million residents in 2021. Given the size of Henan province, these infection numbers might be representative of the nationwide trend.
Fever, cough and sore throat were the most common symptoms, as being revealed by Baidu key word search and the Beijing University report. This points to the low severity of Omicron strain and suggests a potential quick normalization of economic activities after the first wave of infections. As a result, mobility indices, such as subway flows (Exhibit 2), urban traffic congestion and freight transportation, have mostly rebounded to their pre-pandemic levels in 2019.
That said, the elderly population remains at risk given their weaker health condition and lower vaccination ratio. Chinese National Health Commission reported 59,938 COVID-related deaths at medical facilities from December 8, 2022 to January 12, 2023. Among these deaths, 5,503 were caused by respiratory failure directly due to virus, and 54,435 were caused by prior diseases deteriorating after an infection.
Exhibit 1: Baidu pandemic search index
Exhibit 2: China major cities subway passenger flow
Index, 2019 average as 100, 7-day moving average
Average age of the death due to COVID-19 was 80.3, with 90.1% of fatalities above 65 years old. For people aged 80 and above, only 66.4% were fully vaccinated, and 42.3% have taken three doses as of December 13, 2022. Given the high likelihood of repeating infection waves in the future, continued efforts are required to improve vaccination among old population.
Economic activities might be bottoming out
Chinese economy decelerated through the last quarter of 2022, dragged down by the zero-COVID policy in October and November, and then slowed even more in December amid the pickup in COVID-19s infection. Unsurprisingly, real Gross Domestic Product growth declined to 2.9% year-over-year (y/y) in 4Q2022 (3Q2022: +3.9% y/y) according to Chinese National Bureau of Statistics.
In December 2022, cyclical indicators further deteriorated when infection cases peaked. When most people got infected and stayed at home, retail sales decreased 1.8% y/y, in which food services slumped by 14.1% y/y. Meanwhile, industrial production was dragged by labor shortage and its growth rate further decreased to 1.3% y/y (November 2022: 2.2% y/y). Thanks to the government’s infrastructure investment push and monetary easing, fixed asset investment remained relatively stable at 3.1% y/y in the single month.
Despite the weakness, December 2022 might be the trough of Chinese growth trajectory in the near term. High-frequency indicators are pointing to quick recovery of economic activities as the infection has probably peaked across the country. Last week, subway passenger flows have recovered to 70-80% relative to pre-COVID levels in Beijing and Shanghai, and even exceeded the pre-COVID level in Shenzhen.
Looking forward, we expect to see a sustained economic recovery in 2023 as a result of the reopening and policy stimulus. Service sectors should be the early beneficiary as pent-up demand is released. Sales of consumer goods might also pick up due to improving confidence and continued policy support.
On the other hand, risks persist in property sector and local government debt, which requires further credit support. Accommodative policies should also remain in place to support business confidence. Hence, an additional interest rate cut is expected in the first quarter, followed by liquidity facilities by the People's Bank of China.
Since November 2022, expectation for reopening has driven continuous investor inflows in both on-shore and Hong Kong markets. Consumption and sectors relating to economic reopening have been the key beneficiaries. Meanwhile, softening regulatory measures and steady progress on U.S. auditors on Chinese technology companies listed in the U.S. provided additional supports to off-shore technology names.
As economic activities continue to recover, the up-trend is likely to sustain after the Lunar New Year holiday, albeit with a potential sector rotation. After the expectation for consumption recovery is priced in, investors might rotate to long-term themes such as green economy and advanced manufacturing sectors. These strategic sectors play a more important role in the restructuring of China’s economy in the long run and will also benefit from an increasingly friendly policy environment.