China’s Economy Struggles to Get Back on Track
China’s economic recovery has begun in a modest manner. Following the country’s major holiday season, migrant workers have returned to work and children have resumed school. Despite mainland China lifting Covid restrictions in early December, initial data suggests that overall growth is not yet at full throttle.
For example, official loan data for January indicated growth in loans to businesses but a significant decline in loans to households. Nomura’s chief China Economist, Ting Lu, warned against overly optimistic growth expectations and highlighted the importance of closely tracking these high-frequency data for different asset classes and commodity types.
While road and subway traffic in cities have returned to pre-pandemic levels, new home sales and turnover in freight transport remain below last year’s figures. The sluggish demand for mortgages is reflected in the decline of medium- and long-term household loans, as households remain cautious due to the high unemployment rate. However, Zhiwei Zhang, president, and chief economist at Pinpoint Asset Management expects household confidence to gradually improve in the coming months.
Due to the variations in dates for the Lunar New Year on the Gregorian calendar, China’s National Bureau of Statistics does not provide a breakdown of retail sales, industrial production, or fixed asset investment data for January. However, inflation data for January was released, revealing sluggish demand as consumer prices increased by 2.1% from the previous year, slightly lower than Reuters’ polled analysts’ expectations.
The core consumer price index, excluding food and energy, rose by 1% in January, similar to June 2022. Meanwhile, the producer price index, measuring input costs for factories, dropped by 0.8% in January from the previous year, surpassing the 0.5% decline forecast by a Reuters poll. In addition, China’s yuan depreciated to a five-week low against the US dollar following data that showed South Korea’s average daily exports had fallen by 14.5% during the first 10 days of February, adjusting for the Lunar New Year holiday.
Despite this, China’s policymakers are expected to continue supporting the domestic economy, and demand is anticipated to rise as businesses resume work and travel following the Lunar New Year holiday. Morgan Stanley’s Robin Xing predicts loose overall policy this year, with regulators returning to a “growth-focused policy pragmatism,” making it the most favorable backdrop for the private sector “animal spirits” in four years.
Xing anticipates a 5.7% GDP growth for China this year, and Beijing is expected to set a GDP target of around 5% or more in March. Although Nomura’s Lu has warned of a mixed picture, he raised his GDP forecast to 5.3% due to the pandemic and Covid controls ending earlier than expected. He believes that inflation will not be a significant concern in China this year and expects the policy to remain accommodating in 2023.
