China is fast-tracking a return to economic normalcy, having abandoned its zero-Covid policy at the end of last year. We see that powering a growth spurt of more than 6% this year – strong, but not all that strong given the economy is reopening. Working in the opposite direction is a big drop in demand for Chinese exports. That’s what’s forcing authorities to change their policy approach, including on Covid, to try to cushion the effect on growth. The boost from this year’s restart will be a one-off, just as we’ve seen elsewhere in the world. So, attention should also be on what comes next. And we expect longer-term growth to be significantly slower than before the pandemic.
Back to business – and fast
China has swiftly lifted Covid restrictions – rather than phasing them out gradually – in an apparent effort to move past the peak of infections as quickly as possible. That means we expect economic activity to go back to normal fairly rapidly.
People in China are returning to work and socializing more. You can see that in mobility data: travel by subway or car has surged since authorities started lifting restrictions towards the end of last year. See the China on the move chart. Many people hadn’t been back to their hometowns or seen family and friends for years. No surprise then that there was a further pick-up in travel over the Lunar New Year holidays. It’s not only travel spend that’s picking up: excess savings data suggest there’s still plenty of pent-up demand ready to be unleashed. This all bodes well for consumer spending and underscores our view that the economic hit from Covid is likely all but done.
On the investment side, the end of unpredictable lockdowns is likely to gradually revive companies’ investment appetite, especially since the Chinese authorities have taken measures to improve business conditions and promote growth – for example, easing up on their regulatory clampdown on tech firms. Many of those measures will continue to support growth beyond the reopening, too.
China on the move
Sources: Blackrock Investment Institute, with data from WIND, February 2023. Notes: The yellow line shows traffic congestion, measured as the weekly average level of congestion in China's 99 cities. The index represents the ratio of actual travel time for an average urban resident in one trip to travel time without any traffic. The orange line shows the total number of subway journeys across 21 cities in a week. The 21 cities are Beijing, Shanghai, Guangzhou, Shenzhen, Chengdu, Nanjing, Wuhan, Xi'an, Suzhou, Zhengzhou, Changsha, Kunming, Nanning, Dongguan, Shijiazhuang, Xiamen, Hefei, Chongqing, Dalian, Shenyang and Tianjin.
Not as strong as it might have been…
Take all this together, and we see China clocking in growth above 6% this year, compared with weak growth of just 3% in 2022 due to Covid lockdowns and a lack of policy support. That’s strong for a single calendar year, but it’s not that strong for a restart of activity after Covid shutdowns. It contrasts with a much bigger rebound when China emerged from its first lockdown: from 2.3% growth in 2020 to 8.4% in 2021. With 6% growth this year, the two-year average will be only around 4.5%. See the Growth falling below trend chart. In other words, if you average out overall growth through the shutdown and reopening, which should more or less offset each other, growth is set to be below trend, which has itself been slowing over time, from almost 10% in 2010 to around 5% now (see the yellow dotted line).
Growth falling below trend
Sources: BlackRock Investment Institute, National Bureau of Statistics, February 2023. Notes: The orange line shows real GDP growth. The orange dots show the average growth over two years: 2020-2021 and 2022-2023, the latter taking our growth forecast for 2023.
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Export slump motivates more growth-focused policy stance
Why is the two-year average growth rate set to still be below trend? Because just as reopening pushes growth upwards, a deep slump in demand for Chinese exports is pushing it down. Last July, the volume of Chinese exports was growing at 18%, according to data from China’s Customs Administration. By December 2022, it was shrinking by 10%. And we expect export volumes to shrink further in 2023 as a whole, too. Why? A slowdown in western markets is reducing demand. And, with lockdowns long over, a larger share of what consumers are still spending is now going on services instead of (Chinese) goods.
That double whammy in terms of lost foreign demand represents a massive hit to China’s overall growth given that exports account for a fifth of its GDP. We think this change in fortunes could well have played a role in Chinese authorities ending Covid restrictions quickly. Had they continued with the zero-Covid policy, 2023 growth would likely have been intolerably low from their perspective. But the reopening is not a normal recovery. Its effect on growth will be a one-off. That’s why, having now recognised the severity of the exports problem, authorities have taken a more pro-growth approach to policy more broadly. Recent measures have included cutting mortgage rates, easing certain regional restrictions on buying second homes and cutting red tape for exporters. We expect to see more such pro-growth measures ahead.
Beyond the bounce: a shrinking population and slowing productivity growth
Once the reopening has played out, we see two key factors challenging China’s ability to keep growing at more than 5% annually.
The first is a shrinking population. In 2022, China’s population shrank for the first time since the Great Famine of 1959-1961. See the More deaths than births chart. And since the most recent data, the country has suffered a tragic spike in Covid-related deaths, exacerbating the decline in population size. The government could well implement policies to increase the birth rate this year – but that won’t be enough to reverse the decline, we think. The birth rate was falling rapidly even before the pandemic. We think China’s population has likely peaked.
More deaths than births
Sources: BlackRock Investment Institute, National Bureau of Statistics, February 2023. Note: The yellow line shows the number of deaths. The orange line shows the number of babies born.
The implications for economic growth? Fewer workers, and an aging population. That reduces how much the country can produce and grow – unless productivity increases at a faster rate. We think the potential growth rate of the Chinese economy might have fallen to around 5% and could fall further to around 3% by the turn of the decade. If China wants to achieve its long-term target of doubling the 2020 level of GDP by 2035 (which implies 4.7% average annual growth), the authorities will have to implement additional, substantial structural reforms
That’s the second factor. As mentioned above, the authorities have taken a somewhat more pro-growth stance in recent months and have already implemented some policies to support growth. That will continue to prop up growth beyond the reopening. But heightened geopolitical risks and strategic competition with the U.S. mean international trade and tech restrictions, as well as the still strict regulation of companies operating in China, are likely to dampen productivity growth and make it difficult to boost trend growth.
Bottom line: The combination of reopening plus more supportive policy means China is likely to enjoy a growth spurt this year, especially compared with developed markets on the verge of recession – but looking further ahead, we see trend growth slowing.
