Data and Analytics Insights

China’s road back to normal

Xav Feng

Head of Lipper Asia Pacific

With the reopening of its economy, will China head towards recovery and reassert itself as the engine of global economic activity in 2023 and beyond?

The Chinese economy has been the primary engine of regional and global growth for decades and with the world’s second largest economy now prioritising growth in 2023, how will they manage to overcome a turbulent couple of years?

China’s economy beat the market’s expectations to grow by 4.5% year-on-year in the first quarter. The growth was driven by strong consumer spending and a surprisingly large trade surplus. Consumption saw the strongest recovery following China’s relaxation of its zero-Covid policy. According to the National Bureau of Statistics of China, retail sales recorded 10.6% year-on-year growth in March, the fastest rate since July 2021. Services led this recovery, with catering sales surging by 13.9% from January through March amidst ‘revenge spending’ following the withdrawal of Covid 19 restrictions.

Consumption, services and infrastructure spending have perked up, but factory output has lagged amidst weak global growth, whilst slowing prices and surging bank savings are raising doubts about demand.

Exhibit 1: Growth of China economy fastest in a year in Q1

China’s economy beat the market’s expectations to grow by 4.5% year on year in the first quarter of 2023, also beyond the average of COVID period.

Note: Pre-Covid average is from Q1 2011 to Q4 2019, Covid-period average is from Q1 2020 to Q4 2022 Source: LSEG Datastream, Reuters poll | Reuters, 18 April 2023 | By Kripa Jayaram.

Volatility remains

Whilst there are some early signs that point to momentum, a robust economic recovery is not a forgone conclusion. The global macro environment remains complex and ever-changing, and constraints from insufficient domestic demand are obvious, which means the foundation for economic recovery is unsteady. Meanwhile, the government has set a modest GDP growth target of around 5% for this year after badly missing the 2022 goal.

However, year-on-year growth is expected to accelerate in the second quarter owing to lockdown-induced base effects from Q2 2022. Although China’s economic fundamentals will improve over time, lingering challenges could re-emerge as the initial post pandemic recovery momentum recedes. In addition, housing market challenges remain even as new home sales and overall prices have rebounded.

The International Monetary Fund (IMF) raised its economic forecast for the Asia-Pacific region. IMF elaborated that Asia-Pacific will be the most dynamic of the world’s major regions in 2023 and contribute around 70% of global growth. The main development has been the reopening of China, where surging consumption is boosting growth across the region despite weaker demand from the rest of the world. The IMF predicts AsiaPacific’s gross domestic product to expand 4.6% this year from 3.8% last year. This is 0.3 percentage points higher than its forecast in October, according to the IMF’s May regional economic outlook.

Chinese policymakers have pledged to step up support for the $18 trillion economy to keep a lid on unemployment, but they face limited room to manoeuvre as businesses grapple with debt risks, structural woes and global recession worries.

The People’s Bank of China – China’s central bank – extended liquidity support to banks through its mediumterm lending facility, but kept the rate on such loans unchanged. The government – which has refrained from taking big steps to spur consumption – is still relying heavily on infrastructure spending to spur investment and economic growth.

China’s consumer spending and industrial activity grew at a slower pace than expected in April, according to the National Bureau of Statistics of China, signalling the recovery of China’s economy is losing momentum. The record youth jobless rate of 20.4% in April also showed the economy was still struggling to absorb new workers even as the overall labour force declined.

In our view, China needs a strong macro-policy to maintain the current economic recovery momentum whilst implementing a neutral fiscal policy by avoiding a premature tightening. Meanwhile, the Chinese economy rebalances toward consumption in the medium and long term, shifting the growth away from investments. Overall, investors need to be cautioned that whilst the Chinese economic situation was complex and volatile, inadequate domestic demand remains prominent and the foundation for economic recovery is not yet solid.

According to LSEG Lipper, as of 30 April 2023, most of the net new money was attracted by money market funds, accounting for $65.0 billion; followed by equity funds, at $3.5 billion of net inflows; and commodities funds, at $0.2 billion of net outflows. Mixed-assets funds, at negative $24.8 billion, were at the bottom of the table year to date, bettered by bond funds and alternatives funds, at $17.1 billion and $0.4 billion of net outflows, respectively.

All asset types posted positive returns year to date, with commodity funds at 5.8%, followed by equity funds and bond funds, at 3.9% and 1.9% returns, respectively, on average. The best-performing funds for the year to date were commodities funds at 5.8%, followed by equity funds and bond funds, at 3.9% and 1.9% returns, respectively, on average. Alternatives funds, at positive 0.3%, outperformed, followed by money market funds and mixed-assets funds, at positive 1.0% and positive 1.4%, respectively.

Exhibit 2: China fund market flows (US$ millions)

China fund market suffered huge net out-flows after its dropping all COVID restrictions in 2022 but gained net inflows when reopening borders in the first quarter of 2023.

Source: LSEG Lipper, as of 30 April 2023

The role of China, India and Vietnam

Our core conviction remains that Asia and the Pacific continue to be dynamic regions despite the sombre backdrop of what looks to be shaping up as a challenging year for the world economy.

China’s reopening is expected to provide fresh momentum and its market position is relatively low compared to other key regional giants.

Meanwhile, India continues to maintain its rapid economic growth and remains one of the fastest-growing major global economies, driven by resilient domestic demand, strong private sector investment and the healthy balance sheets of most Indian companies. The International Monetary Fund (IMF) expects India to grow by 5.9% in FY 2023–24, as against global economic growth of 2.8%, and by an average rate of 6.1% over the next five years. This is expected to be largely driven by private consumption and investment, fueled by government policies to improve transport infrastructure, logistics, and the business ecosystem.

The Indian government’s strong infrastructure push under the Prime Minister’s Gati Shakti (National Master Plan for Multimodal Connectivity) initiative, logistics development, and industrial corridor development will contribute significantly to raising industrial competitiveness and boosting future growth.

India’s economic growth is stronger than in many peer economies and reflects relatively robust domestic consumption and lesser dependence on global demand. Moreover, India has overtaken China as the world’s most populous country, according to UN population estimates, being the most significant shift in global demographics since records began. We believe India will continue to sustain and accelerate this positive momentum over the next few years and along with China, is poised to play a key part in boosting the global economy.

Another new star is Vietnam, which is an export-led economy, fuelled mainly by foreign direct investment (FDI) attracted by low labour costs and an open economy with 15 free trade agreements. In addition, Vietnam is now seen as an alternative production base to China. Given the ongoing tensions between the U.S. and China, Vietnam is expected to remain a magnet for FDI from sources seeking to diversify their production outside of China.

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