Worst could be over for China’s economy as reopening unleashes pent-up demand

Weighed down by the zero-Covid policy and disruptions from a rise in infections in December, the Chinese economy decelerated in the final quarter of 2022, with real GDP growth slowing to 2.9 per cent year on year. Despite this weakness, data suggests December may have been the low point for the Chinese economy. Domestically, the drastic shift in pandemic policy has seen a wave of Covid-19 infections sweep across the country. A research team from Peking University estimates that infections peaked in most regions before December 20, and that 64 per cent of the country’s population was infected as of January 11. As infections spread, searches for key symptoms such as fever, cough and sore throat on the Baidu search engine indicate that the public has picked up on the lower severity of the Omicron variant of Covid-19. This has prompted a fairly quick normalisation of economic activities. As of last week, subway passenger flows had recovered to 70 to 80 per cent relative to pre-Covid-19 levels in Beijing and Shanghai, and exceeded the pre-Covid-19 levels in Shenzhen. Urban traffic congestion and freight transport have also largely rebounded to 2019 pre-pandemic levels. That said, China’s housing activity is likely to remain weak amid sluggish income and house price expectations coupled with ongoing concerns about home availability. China’s key role within global supply chains and its sizeable consumer market mean these developments will also affect key economic partners. During the pandemic, restrictions and concerns over the economic outlook led to a rise in China’s savings rate, averaging 33 per cent between the first quarter of 2020 and the third quarter of 2022, more than 4 per cent higher than the average between 2015 and 2019. This implies a substantial amount of pent-up demand with savings being released both domestically and abroad as Chinese travellers move freely in and out of the country without the hurdles of quarantine and mass testing. In 2019, more than 150 million Chinese travelled abroad and spent an aggregate of US$255 billion, accounting for around 17 per cent of the global outbound travel market. Since the end of November, the number of international flights from China has risen by more than 20 per cent. Tourist arrival numbers in several Asia-Pacific countries still sits at around 50 per cent of 2019 levels, meaning there is plenty of room for further recovery. This will support private consumption and offset some of the impact of recessionary concerns in the US and Europe. China’s economic slowdown in 2022 was undoubtedly a headwind on the region’s export momentum, with Asian export growth to China contracting from mid-2022 while export growth to the US and Europe largely held up. This trend is likely to reverse if demand sours in the US and Europe this year, while China’s recovery can cushion Asian exports against a global downturn. Looking at various economies’ value-added exposure to final demand in China reveals that a recovery will benefit Hong Kong and Singapore the most. Both have more than 25 per cent exposure to China’s final demand. China’s reopening will also have implications in the commodity market. Between 2021 and 2022, China’s imports of crude oil saw an average decline of 4 per cent year on year every month, much lower than the monthly average 12 per cent year-on-year increase in 2019. Should Chinese demand for oil pick up, this could worsen the supply shortage and squeeze prices higher if the Organisation of Petroleum Exporting Countries or other producers refuse to raise production. A revival in construction could also increase demand for commodities such as iron ore and cement. China reopening, Asia rebound could see global recession avoided in 2023 China’s economic engine is beginning to heat up. Its reopening will be an important counterbalance to the slowing growth in the US and Europe in 2023. This rebound will be largely driven by consumption rather than investment, which means it will be concentrated in consumer-sensitive sectors, tourism and retail markets. As economic activities continue to recover, the upwards trend is likely to be sustained after the Lunar New Year holiday. As the cyclical recovery plays out, there will be an increased focus on providing policy support to strategic sectors such as green economy and advanced manufacturing sectors. These will be important pillars in the long-term for China’s economy. Marcella Chow is a global market strategist at J.P. Morgan Asset Management