Everything in the Chinese economy this year is certain, however, the nature and speed of this year remain uncertain. After a slow start, we think the economy may only be in the summer, but there is a threat that the economy will get going. overheating until the end of the year.
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A lot of study notes on the history of China’s reopening tell a very positive and positive story. But we believe that some of them are unaware of the many demanding situations that the economy still faces. This includes, for example, more flight probable. de inbound due to outbound tourism, the likely slow recovery of the real estate market and the challenging export environment. We are also involved in the intensification of the technological war and its effect on foreign direct investment in China. Another threat we feel is not talked about enough is the potential threat of superior leverage through some local governments. This could turn into disorder within several years, creating a scenario similar to the housing crisis of 2022.
We will start with our forecasts of the macroeconomic environment and delve into the opportunities and dangers of the economy.
We expect GDP expansion of 5% in 2023. An upward revision of this forecast is more likely than a downward revision after the release of the first quarter data. But those figures will be released until mid-April. For now, the justification because the direction of the forecasts is more significant than the numbers themselves.
With all Covid-19 restrictions lifted to the maximum, staff are back in the paints, the vast majority of factories are no longer operating in a closed circuit and land and port traffic has returned to general. Going back to general means more jobs for staff, and maximum idle staff will be able to locate new paints in the first quarter of this year. We also expect wages to increase in the current part of 2023 accordingly.
Employment expansion will create an expansion of admission, and this appears to be the main driving force of China’s economy this year. During Chinese New Year, other cash-rich people were able to end luxuriously because department stores were open for business and other people were gone. Locked. But for the middle-income group, purchasing power has declined because some have lost their jobs. We anticipate that most of those who have lost their jobs deserve to be able to find new paintings by the end of the first quarter. Those who work in factories, especially the younger generation, may decide to move from production to the service sector, where jobs grow faster as the economy recovers. Consumption is expected to pick up strongly in the May holidays. By 2022, China’s retail sales may also increase by 8-10% to 48 trillion yuan in 2023.
In recent years, more duty-free shops have been established in China with a wider diversity of products, satisfying the luxury grocery shopping desires of some Chinese residents. However, when outbound tourism resumes, China is very likely to face a flight of customers, as some of those purchases will be made abroad.
We expect grocery shopping trips to Europe during the Golden Week holiday in May to return to pre-pandemic levels. In the decade before Covid, Chinese consumers accounted for a third of global luxury sales. It is expected to be very fast year after year in 2023.
Infrastructure investment will be the biggest driving force behind China’s economic expansion this year. The total amount of new special local government bonds to be issued this year will be CNY4 trillion, almost the same as CNY4 trillion in 2022, and above CNY 3. 65. trillion planned for early 2022 due to Covid-related spending.
By 2023, while not all of the budget from those bond issues will be used for infrastructure, we expect about 70% of the budget to be used for those purposes. economy after the reopening, and it is the limitation of infrastructure spending in recent years, apart from that related to Covid.
In 2023, we expect local governments to catch up with infrastructure planning. We expect more interprovincial and comfortable infrastructure, adding science and generation development, to take position in 2023. If much of the four trillion yuan of special local government bonds is issued around the two sessions in early March, then we deserve to see a rebound in infrastructure investment at the time and in the third quarter. The graphs show that infrastructure investments are generally delayed with respect to the issuance of special local government bonds for about 3 months. Infrastructure structure activity will then be concentrated in the 3rd quarter.
The weaknesses in the economy this year will come mainly from weak expansion in U. S. export markets. This will result in a decrease in export orders for the Easter holidays. The winter holidays of the year can also be affected. While net exports contribute only 0. 5 percentage points to GDP expansion in 2022, they also create activity in manufacturing, logistics, and industrial finance, all of which contribute more to GDP. Export markets in 2023 will be a challenge for China’s economic expansion.
We expect an overall commercial production expansion of around 4% in 2023, but export-related production activity may contract around 5%, especially semiconductors.
Home sales are recovering, albeit very slowly and especially in the central spaces of the 4 major cities. -The year-on-year decrease turned out to have bottomed out. As a result, housing inventory should have peaked. However, a forged recovery will require a recovery of potential buyers’ confidence in the ability of asset developers to carry out their projects. More recently, property developers have had more access to finance, adding thanks from banks to the People’s Bank of China’s (PBoC) accommodative policy for property developers, as well as access to foreign financing. Developers bring to light their projects, which will still help regain acceptance from potential buyers.
After several years of economic slowdown in China, are there enough potential buyers in the market for asset prices?It fell sharply and space savings increased. This suggests that some of those savings were the result of deferred initial bills on the purchase of residential assets. So, at least for some potential buyers, the savings for initial bills are ready. . On the one hand, confidence in the housing market remains low. In addition, safety at work remains at stake through recent events. When the economy starts growing in the current quarter of this year, there should be an improvement in the hard work market. And the sentiment of homebuying activity deserves to increase, leading to more real estate transactions and higher space prices.
While economic expansion is very likely to recover to pre-pandemic rates during the fourth quarter, we expect CPI expansion of just 2. 2% year-over-year. Lately there is no inflationary tension in the Chinese economy. Here of food, where the costs of red meat have been volatile.
However, the PPI is expected to begin to emerge once the structure sector recovers. As discussed above, the activity of the structure in 2023 includes the residential asset structure and the infrastructure structure. Unless energy costs rise in 2023, which is not our base case, PPI is sometimes not transmitted smoothly to the CPI in China. We can see from the graph that the PPI in the downstream consumption category is quite stable, while the PPI in the upstream generation category is much more volatile. In fact, raw curtain costs have a greater effect on PPI in upstream production. Therefore, when infrastructure and residential structure activity is strong, the upstream PPI will be structured more quickly. However, this is not expected to have much effect on CPI inflation. Industries with a giant share of costs similar to fabrics structure can, consequently, enjoy a reduction in profit margins.
In 2022, the actual use of foreign investment in China reached 1. 2 trillion yuan, up 6. 3% from 2021, but well below the 14. 9% expansion in 2021. The main explanation for the slowdown in FDI expansion is that some corporations are making plans or have already done so. moved their factories out of China as a result of Covid supply chain disruptions.
A vital question is whether China’s economic recovery will oppose the corporations’ decision to relocate their things. After China lifted its Covid-related restrictions, land and port logistics ceased to be an issue. This is no longer the case.
However, there is another threat from an expanding supply chain. As the generational war between China and the U. S. UU. se intensifies and corporations become increasingly involved in geopolitical issues, corporations may continue to plan to move production out of China or load more production elsewhere to supplement production. in China. La ASEAN region is becoming a place of choice for multinationals as well as some Chinese corporations.
When we communicate about China’s offshoring, we take into account the production burden in China, which is no longer reasonable in terms of wages and land prices. Wages in China are higher than in most ASEAN economies. The most likely to shift production out of China are low-value-added products, such as textiles and clothing, plastics and paper.
But it’s not just about production costs, it’s also about technological warfare. Multinational corporations involved in the technology, such as semiconductor production, would arguably be more concerned about continued production in China. Semiconductor production corporations with production services in China may also simply be the first industries to leave China as a result of the tech war.
Strong credit expansion in January and the PBoC left the 1-year medium-term loan facility (MLF) rate unchanged at 2. 75%. This suggests that the central bank should adopt a wait-and-see technique at the beginning of the economic recovery. In addition, we have noticed that the PBoC increases the injection of liquidity through the 1-year MLF tool, which implies that it sees bank loans accumulating more after January.
For reasons, we do not expect the central bank to reduce the reserve requirement.
However, this does not mean that the central bank will do nothing. We believe the PBoC will continue to offer lending programs to complement central government policies in express areas. These come with asset developers to prevent further defaults, rural progress to decrease wealth. gap and generation to enable self-progress.
The International Monetary Fund has estimated that China’s overall public debt will amount to RMB 94. 73 trillion in 2022, or about 78% of GDP. It is quite threatening. But the fear about China’s fiscal fitness comes not from the central government but from some local governments.
This is not a challenge for all local governments, and the threats are greater for those who have traditionally relied on land sales as a vital source of income. With the housing market quiet in 2022 and only partially quiet in 2023, those local governments face the threat of debt service this year, suggesting they will have to borrow more to pay bills when they come due.
The central government understands this challenge and has therefore accelerated land sales. But applying for land through asset developers will take time due to persistent money shortages, and uncertainty about long-term land income has become central to our local government considerations.
It may be too early to communicate about overheating because it is so early in the economy and. But China has a reputation for helping the economy too temporarily through supportive policies.
This year, we expect the central bank to channel liquidity to the express sectors and, as a result, we are involved in some sectors of the economy getting too much reasonable investment in a short period of time, which will lead to overheating in some sectors.
We anticipate that technology and progression (R
While the US Federal Reserve may maintain its highly anticipated turn towards rate cuts and the PBoC is on hold, it is clear that the relative economic strength of China and the US in 2023 will be different than in 2022. The 2022 story is all about Chinese weakness and American strength. But by 2023, it will most likely be the other way around.
The update on the relative economic strength of China and the United States (read here the recent note of our American economist James Knightley on the US CPI). capital inflows if U. S. economiesand Europe are weakening further. Global asset managers can reallocate their asset portfolios by mid-2023.
U. S. and China Inventory Exchanges
There are many opportunities in China for the domestic market in 2023, from entry to infrastructure, but much less for export-oriented industries. Our GDP expansion forecast of 5% deserves to be revised upwards rather than downwards. The technological war will affect foreign direct investment. in China, and China will have to rely more on itself to advance technology. This will place a tax burden on some local governments, while asset revenues will remain lower than before the pandemic. Since the national economy will be more powerful than last year, while the U. S. economy will be more powerful than last year. While the U. S. may be weaker than in 2022, we expect the yuan to appreciate in 2023, to USDCNY 6. 5.
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Chief Economist, Greater China
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