Following the cessation of China’s zero-Covid policy last December, the rate of Covid-19 infections has skyrocketed, with Wu Zunyou, chief epidemiologist at the China Center for Disease Control and Prevention, predicting China will experience three waves of Covid-19 infections this coming winter. The first wave is underway and is expected to have peaked early this month. It will then be followed by a second wave, triggered by the movement of people for the Lunar New Year holiday (January 21–27), which will last until mid-February. The third wave will occur from late February to mid-March, with people returning to work after vacation. The speed of contagion spread seems to be so high that the whole process may be catalyzing.
Meanwhile, there seems to be a consensus that for economic activity to return to normal, the market to function and the economy to grow significantly, the “wartime” anti-pandemic regime needs to be discontinued. Apart from some protests, what made the Chinese authorities turn around 180º with such haste? It is most likely the performance of the Chinese economy in the last quarter of 2022.
Preliminary GDP data for 2022 will only be released later in January. However, according to the Rodhium Group, in the first three quarters, growth on an annualized basis will have been 3%, supported by modest increases in household and public consumption (+1.2%), business investment (+0.8%) and net exports (+1.0%).
In the last quarter of 2022, there was a progressive downturn in the economy. In terms of household consumption, retail sales fell 0.5% in October and again by 5.9% in November. Public expenditure figures are hard to come by, but there is no reason to believe that it has offset the reduction in domestic demand. If we conservatively assume a 2% contraction in consumption in Q4 – similar to what we saw in Q2 – we can expect an annual contribution from household and government expenditure of about +0.8% of GDP.
When it comes to business investment, the fourth quarter of 2022 was poor. In November, there was a significant drop in new properties for which construction was started (-49.7%) or completed (-18.3%). Industrial production of construction-related products also fell, including cement (-3%), asphalt (-7%) and UPR (-39%). While this is a consequence of policies to correct the housing bubble, total investment in the constructions sector is only expected to contribute +0.6% to GDP.
Surprisingly, China’s net exports rose. But by the end of the year, with global interest rates rising and inflation, this trend was no longer clear. At best, there may have been a modest increase in the fourth quarter, resulting in a maximum net export contribution of +1.1% to the 2022 GDP.
The first quarter of 2023 will be tough in China, with waves of hundreds of millions infected by Covid-19, the real estate and construction sector still in readjustment and under immense uncertainty, and the economy stagnant or exhibiting low growth. Then better days will come. But only then.