The world is counting on China’s economic bounce back after the Covid-19 plague to power global growth and keep recession at bay. Contrary to the expectations of many businesses spread throughout the world, this ripple effect of China’s recovery could be weaker than they would like.
Consumers are spending again
Since the lifting of covid restrictions in December, apart from the brief lull when everyone got sick, the phenomenon that most evidently followed was that Chinese people are spending again. Indeed, unlike the previous three years when citizens either were in lockdown or lived under the consistent threat of it, people have begun queuing at restaurants, crowding parks, and hitting the road for travel.
Reopening is expected to lift core goods exports among China’s trade partners. Economists estimate that reopening should increase domestic demand by up to 5% in China. Unsurprisingly, this is welcome news for China’s regional neighbors, as Asia-Pacific economies export more goods to China than many Western economies. This return in goods demand could provide a moderate boost of around 0.4% to GDP in most Asia-Pacific economies (Goldman Sachs, 2023).
China's adjustment of its COVID-19 pandemic response will speed up its own economic recovery and boost global economic growth, according to a report issued by Goldman Sachs Research on Friday.
"Our economists now forecast China's GDP (gross domestic product) to grow by 6.5 percent in 2023 on a Q4/Q4 basis," up from the previous forecast of 5.5 percent made at the end of last November, according to the report.
On top of that, it said that global GDP could be raised by 1 percent by the end of 2023 due to China's adjustment (ECNS, 2023).
Not as good as expected?
What's important for the global economy, though, is that this kind of recovery led by consumers is kind of unusual for China. That’s to say, normally, when China is the engine of global growth, it's led by stimulus, and it's led by investment, investment in buildings, investment in machinery, and investment in infrastructure, and that kind of investment ad recoveries are greatly beneficial for the world economy. Using an economist phrase has lots of positive spillover effects on the world economy.
Nevertheless, this time it’s different. Understandably, after three years of unstableness, Chinese consumers have become notably less confident and more cautious compared to prior pandemic periods. Besides saving more, they primarily spend money on services rather than goods that are domestically produced (WSJ news, 2023).
A conspicuous demonstration of this point is the contrast between the transportations and housing businesses. While road and subway traffic in cities is back above pre-pandemic levels in 2019, the Nomura report also pointed out that new home sales remained below last year’s levels, mostly dragged down by falling sales in mid-sized cities, and weighing on construction activity.
Sluggish demand for mortgages showed up in a slightly steeper drop in medium- and long-term household loans than short-term ones.
The “unemployment rate is still high, which keeps household confidence weak,” Zhiwei Zhang, president, and chief economist at Pinpoint Asset Management, said in a note about January’s loan data. “I’d expect household confidence to improve as well in the coming months, but it will likely be a gradual process.” (CNBC, 2023)
Lack of economic confidence, together with the present phenomenon of more consumption in service sectors, all result in this rather weak ripple effect over the globe. In the past, any and every part of input needed, whether it machinery, or commodities, it would suck from the rest of the world, pouring out investments to those businesses and stimulating their growth. But post such an unusual and untraditional lockdown; no one could have predicted this also unwonted circumstance, yet looking back, it is somehow set beforehand that the economy would reopen like this.
What next for China’s economy?
China’s policymakers are undoubtedly expected to remain supportive of the domestic economy.
Robin Xing, the chief China economist at Morgan Stanley, pointed out that in-person meetings are particularly important for doing business in China and that such interactions weren’t easily feasible last year. He expects the overall policy will be loose this year and that regulators have returned to “growth-focused policy pragmatism.”
He forecasts China’s GDP can grow by 5.7% this year, and Beijing is widely expected to set a GDP target of around 5% or more in March.
So far, there appear no signs of returning to lockdown. As long as this loosened policy is maintained, the world will share an optimistic view of the future of the Chinese economy.
Reference
China's reopening is poised to boost global growth. Goldman Sachs. (2023, February 10). Retrieved February 16, 2023, from https://www.goldmansachs.com/insights/pages/chinas-reopening-is-poised-to-boost-global-growth.html
China's adjustment of covid-19 response to boost global growth in 2023: Goldman Sachs. China News Service Website - Headlines, stories, photos and videos. (n.d.). Retrieved February 16, 2023, from https://www.ecns.cn/news/economy/2023-02-12/detail-ihckshyv8416313.shtml
Why China's recovery likely won't save the world economy. Spotify. (2023, February 14). Retrieved February 16, 2023, from https://open.spotify.com/episode/3vs11wQO7uzfKezXFr3oDL
Chengevelyn. (2023, February 15). China's economic recovery is off to a slow start. CNBC. Retrieved February 16, 2023, from https://www.cnbc.com/2023/02/15/chinas-economic-recovery-is-off-to-a-slow-start.html