Next year should be a key period for China’s economic recovery, with significant growth expected in the stock market. Let’s take a look at the main factors affecting China’s economy.
Coronavirus situation. In the past few weeks, the Chinese government has announced more than 20 measures to relax the “zero tolerance” policy for COVID-19, which is a positive development and could lead to the beginning of a gradual opening of the economy in the spring of 2023.
It is worth noting that the removal of coronavirus restrictions is not a panacea, and the positive effect may not appear immediately. Based on the experience of other countries, it is reasonable to expect an increase in the number of infections after the opening of the economy, which will lead to a temporary reduction in labor supply and some restrictions on population mobility.
As such, we expect GDP growth in the first three quarters of 2023 to be below the historical average again, but the pace will begin to accelerate in the 4th quarter and beyond in 2024.
Real Estate Sector The downturn in the housing market was one of the biggest factors that contributed to the slowdown in the PRC economy in 2022, with the housing market experiencing its worst correction in the first 10 months on record. Nevertheless, the government’s support initiatives, which were unveiled in November, sent a clear signal that the government is seeking to offset the effect on the economy of the housing market downturn.
The new measures have begun to go beyond support for housing demand, and are explicitly aimed at solving the problem of financing for real estate developers. Given this, we can expect to see some stabilization and a slowdown in market activity, which will reduce the pressure on economic growth in 2023.
Consumer activity Declining consumer spending is another major headwind facing China. In 2022, the contribution of consumption to GDP growth was 1.2%, well below the pre-pandemic level of 4.1%. In addition to coronavirus constraints, the decline in activity is due to a slow recovery in income, an increase in savings, and a fall in household wealth. At the same time, household debt has risen significantly, limiting opportunities for new purchases.
Although the opening of the economy will support consumer demand in 2023, the pace of growth will remain weak before incomes normalize and concerns about new lockdowns among the population subside. One possible source of consumption growth could be new stimulus packages from the government for certain categories of citizens.
Relations with the U.S. In October, the U.S. Department of Commerce announced new rules that limit exports of advanced semiconductors to China. The U.S. government is also considering new export restrictions and joint implementation with allies. Technology is likely to remain a major battleground in strategic competition between the U.S. and China in 2023.
Another key issue between the countries is Taiwan. A meeting between Biden and Xi Jinping in November, in which the presidents agreed to adhere to a “one-China policy,” contributed to some reduction in geopolitical tensions. In addition, the recent election victory in Taiwan by the opposition Kuomintang party, which supports rapprochement with mainland China, will also help reduce the geopolitical risk.
We expect China’s economy to recover at a moderate pace in the first half of the year and move to acceleration by the end of the year. Against this backdrop, we also expect Chinese equities to recover from historical lows. Taking exposure through KraneShares CSI China Internet ETF #KWEB.
