Just recently, China’s State Council announced 20 key parameters to limitedly relax some of its COVID-19 control policies. This has brought some optimism to both its society and the market. Previously, investment institutions have expressed some positive views on the country's economic recovery. Goldman Sachs, for instance, believes that China may begin to prepare to ease its pandemic measures, which could drive a 20% gain in Chinese equities. JPMorgan Chase said that starting in October this year, the Chinese stock market sees a year-end rebound. Some institutions have judged that it will take about a year for China's economy to recover, and it will return to normal by the end of 2023.
It should be pointed out that COVID-19 control measures in China are extremely complicated, involving the economy and society, with the results remaining to be seen. Looking from the economic perspective alone, researchers at ANBOUND believe that it is not appropriate to be overly optimistic about the country’s post-pandemic economic recovery. There are a few reasons for this:
First of all, the length of the pandemic recovery period is itself an issue. China is a huge country with highly complicated COVID-19 preventive conditions, and this involves changes in multiple aspects like policies, society, and economy. Judging from the situation so far, what holds in the future remains uncertain, and the possibility of 2023 being the year that China returns to normal is very small. If the recovery period is longer than a year, it can be expected that the time frame would extend to 2024.
Second, the Chinese economy will show restorative growth during the recovery period from the pandemic. However, since this growth is restorative, it is very different from the normal growth pattern and is distinctive in its significance. Normal growth is developmental and incremental, while restorative growth is compensatory and reparative. Due to the different bases of economic growth, the state of economic recovery will also carry dissimilar connotations. The growth in the recovery period has data comparison significance, but there is no new contribution to the total economic volume. Such growth, which is statistically meaningful but lacks incremental contributions, could very well be the reality of its economic recovery.
China’s Quarterly Economic Growth Rate in Q3, 2019 – 2022 (%)
Source: National Bureau of Statistics, chart plotted by ANBOUND
Third, the damage of the pandemic to China’s economic structure should not be ignored. In the past few years, the economic cost of COVID-19 outbreaks in China has been rather high. This is not only reflected in the loss of economic added value (for instance, if the GDP growth slows down by 3 percentage points, the added value will be reduced by more than RMB 3 trillion), and there are other damages that may not be recovered at all. The central government has repeatedly emphasized the need for stable market players. Once a company closes down, it may cease to exist for good (statistics from Tsinghua University show that in the first half of 2022, 460,000 companies closed down and 3.1 million individual industrial and commercial households had been written off). When the supply chain has been restructured, it might be withdrawn permanently, and a damaged market ecology could be long-lasting. These structural economic damages will have a massive negative impact on China’s domestic purchasing power and reinvestment.
Fourth, various aspects inhibit investment in the Chinese market. Against the backdrop of continuous interest rate hikes in the United States and Europe, China sees a trend of higher interest rates, and the Chinese economy is facing considerable downward pressure. The real estate market of the country is declining, and consumer demand continues to be sluggish. These, and many other factors are affecting investment in the country. In the first three quarters of this year, China’s national growth rate of fixed asset investment was only 5.9%, of which the growth rate of private investment was only 2%. This is true not only in the real economy but also in its stock market and other capital markets, which can be seen from the repeated declines this year. Judging from these facts, it is hard to accept Goldman Sachs' optimistic forecast for the future development of the Chinese market.
Fifth, the potential risks faced by China’s financial institutions, especially banks, have increased. Many believe that financial institutions should be allowed to adopt quantitative easing measures for economic recovery. However, this is quite risky. If financial institutions, especially banks, make such a move, it may provide capital power to the market in a short period of time, yet soon retaliatory crises, collapses, and asset deteriorations will occur. The turmoil in the financial sector will soon be reflected directly on the macro level, to the point of getting out of control.
Sixth, the slowdown in the external demand market will cause China's optimistic exports soon encounter a bottleneck. In the three years since the outbreak of the novel coronavirus, China's economy has shown resilience in the first two years, which is related to the world suffering from production setbacks, while China resumed production and benefitted from it. In 2021, the total import and export value of China's trade in goods was RMB 39.1 trillion, a year-on-year increase of 21.4%; of which exports had reached RMB 21.7 trillion, a year-on-year increase of 21.2%. However, this year's export pull was significantly lower. With the effect of the continuous interest rate hike in the United States, the economic slowdown in developed countries will curb demand and therefore imports. This has, in turn, greatly affected China's exports. In the first 10 months of 2022, China's imports and exports of goods increased by 9.5% year-on-year (almost a reduction of half of it compared with the same period last year), and exports increased by 13% year-on-year. Such a slowdown will weaken the support role of exports to the country’s economy.
Seventh, it is unrealistic and impossible to rely on state-owned enterprises (SOEs) to drive China's economic growth. Since the beginning of this year, SOEs have played a more important role in the economy. In the first nine months of this year, the growth rate of the country’s private investment was only 2.0% year-on-year, while the growth rate of state-owned enterprise investment in the same period was 10.6%. However, the state-owned economy alone, which only accounts for a small proportion of the Chinese economy, cannot support the Chinese economy.
Finally, problems in agriculture and rural areas may continue to be exposed. The coexistence of various problems, such as population loss in rural areas, aging, lack of substantial improvement in agricultural production, and lag in rural reform, has limited the development of China's agriculture and rural areas towards modernization. As the issue of returning urban population and the aging problem become more prominent, the country’s agriculture sector will see more troubles ahead, which poses a direct challenge to its rural revitalization.
Final analysis conclusion:
The COVID-19 pandemic is an unexpected shock in the process of China's economic development. It is not the only problem facing the Chinese economy, but it does trigger multiple problems to occur simultaneously. As China attempt to recover from the impact of the pandemic, the process is likely to be complicated and lengthy. Considering the challenges ahead, such a process does not seem to be overly optimistic.
