Based on the assumption that by the end of Q1 2023, the zero-covid policy would be phased out in China, several relevant international banking groups (Goldman Sachs, J.P. Morgan, Morgan Stanley, Bank of America, Credit Suisse, Deutsche Bank, HSBC) have made economic projections for 2023. The Chinese government has anticipated this, and despite the forecast of three successive waves of infection, the instructions are for economic activity to return to normal, including workers with covid to resume in-person work.
What consequences will this expedited schedule have on the recovery of the Chinese economy in 2023? According to a report issued at the end of September 2022, J.P. Morgan Asset Management forecasts that China’s GDP growth will reach 5.4% in 2023. Other international financial institutions may make similarly optimistic forecasts regarding the evolution of the Chinese economy after the ongoing waves of infections. This would help offset the economic slowdown and recession in the US and Europe. But we are doubtful that there are grounds for optimism. Here, we shall analyze the issues regarding investment.
The main driver of investment in China, the real estate sector (for decades responsible for >25% of GDP), remains oversaturated. There is a large mismatch between the demand for homes to live in (550-750 million sqm/year) and the present annual supply of 1,240 million sqm (coming from a peak of 1,730 million sqm in June 2021) for residential purposes. In order to reach sustainable levels, construction will have to continue to contract at the current pace for another four to six quarters. That has been the policy of the Chinese government. Will it keep it up knowing that it slows economic growth in the short term?
The outlook for infrastructure investment is not looking good either. Provincial governments are under budgetary pressure due to declining revenues from land sales. Many local government finance vehicles (LGFVs) – the main mechanisms for executing infrastructure projects – are in the midst of a credit crunch, and defaults are expected in 2023. The central government has been pressuring provincial governments for additional infrastructure investments, from projects already approved by the central government. These constraints do not bode well for growth in this investment segment.
Finally, private sector investment is expected to falter, partly due to the problems created by the waves of covid infections, and partly due to uncertainty stemming from the government’s posture toward the role of the private sector vs. public companies, recent restrictions in the technology sectors, and “common prosperity” policies. Exporting firms are expected to decrease their propensity for new investment, given the decline in international trade (from 5.5% in 2022 to between approximately 1.2% and 3.8% in 2023, according to the IMF).
There has also been a credit crunch in banks as a result of the pressure for better loan risk analysis.
In the pre-pandemic years, investment contributed between 2 and 4 percentage points per year to China’s GDP growth. By 2023, it is not likely to return to these figures.