The Chinese economy missed its early government target of 5.5% in its biggest miss in decades after Covid-19 ravaged output but expectations for an acceleration of growth from the second quarter are mounting.

BY:       JAMES PHILLIPPS

17 January 2023

The Chinese economy grew by just 3% in 2022, marking its biggest GDP miss in decades as the zero-Covid policy constricted output, but hopes for a rapid recovery are increasing.

Although economic growth fell to 2.9% year-on-year in the fourth quarter, from 3.9% in the third, according to the Chinese Bureau of Statistics, this was way ahead of a Bloomberg survey of economists, which forecasted a 1.6% expansion.

The sudden reopening of the economy mid-December drove a spike in Covid infections, pushing down retail sales by 1.8% year-on-year and food services by 14.1% over the month, as people stayed home. Industrial production also decreased by a further 1.3% as labour shortages were exacerbated.

‘Despite the weakness, December might be the bottom of Chinese growth trajectory in the near term,’ said Chaoping Zhu, global market strategist at JP Morgan Asset Management.

‘High-frequency indicators are pointing to quick recovery of economic activities as the infection has probably peaked across the country.’

Subway passenger numbers had recovered to 70-80% of pre-Covid-19 levels in Beijing and Shanghai, and even surpassed them in Shenzhen, Zhu noted.

Union Bancaire Privée (UBP) cautioned a big unknown was the level of Covid-19 infections in the rural parts of the country. With extensive travelling expected around Chinese New Year next week, the markets will be able to get a better handle on the Covid-19 numbers.

‘A better-than-expected reading could further fuel the rally in Chinese assets, as it will reduce concerns about weaker activity in the first quarter,’ UBP wrote in a note today.

The bank is turning increasingly bullish for the second half of the year, when Covid is expected to ease, enabling a consumption-led recovery to take hold from the second or third quarter.

‘Compounded with a strong favourable base effect, we also envision upside risks to our above consensus 2023 GDP growth forecast of 5.2%,’ the bank added.

Investors have been growing increasingly positive on Chinese equities since the Covid policy pivot, with Bank of America predicting a ‘steady recovery’ from the second quarter. SocGen sounded a more cautious note earlier month, however, predicting the market will remain flat for the rest of the year after the CSI 300 index’s recovery since its 31 October low.

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