Optimism has been returning to China's economy -- but can it last?

7:58 am ET January 18, 2023 (MarketWatch) Print

By Tanner Brown

Worries emerge that an economic rebound will be a one-off, as pent-up consumer demand spikes following the lifting of the long-running zero-COVID policy

Investor sentiment in China has been on an upswing, with markets experiencing a double-digit bull run when officials announced the end of harsh COVID-containment measures in November. But observers immediately began asking: How sustainable is the rebound?

The flood of economic data released this week in Beijing -- showing, for example, an official annual economic growth rate of just 3% and an exceedingly rare population dip in the planet's most populous country, for example -- added urgency to that question.

As the new year dawned, a number of positive moves had put wind in the sails of mainland Chinese and Hong Kong stock indexes, which have been awaiting good news after one of their worst years on record.

First, Beijing scrapped domestic anti-virus measures, finally allowing free movement to frustrated consumers, who investors hope are ready to act on pent-up demand.

Next, quarantine requirements for international arrivals were dropped. Prospective travelers are now awaiting a normalization of China-bound flight prices, which remain well above pre-pandemic levels. Officials said publicly that they were confident such a trend was imminent, adding that flights coming into and out of China should reach 25% of their 2019 levels by March.

Immediately following Beijing's abrupt scrapping of its draconian zero-COVID measures, policy makers said they were also ending their years-long tech-industry crackdown, sending shares of Alibaba Group Holding (9988.HK) and Tencent Holdings toward a net gain of $100 billion in market value.

Further, authorities were planning to ease borrowing restrictions for property developers, Chinese media reported, seen as a lifeline for the long-beleaguered sector.

"The theme of a reopening of China is not just about the increasing convenience of cross-boundary trade, investment and traveling," said Bruce Pang, head of research and chief economist for Greater China at Jones Lang LaSalle.

"It also includes China's pragmatic policy stance toward a more growth-focused strategy, pro-business policies that could shore up confidence and sentiment, and steadfast commitment on reform and opening up," he told MarketWatch.

Alongside rising market sentiment have been upward revisions of China's expected 2023 GDP growth. Morgan Stanley on Monday lifted its forecast to 5.7% from just above 5%.

Yet unknowns remain -- chief among them how swiftly China's COVID "tsunami" will sweep through the country. Public health experts have been hesitant to make unequivocal predictions, as Chinese authorities proved reluctant to release data on case numbers, deaths or variants. When the central government conceded that 60,000 people had recently died of the coronavirus-borne disease, it hastened to add that the peak had passed. The World Health Organization has called publicly for more detail and greater transparency.

Recent data from internet giant Baidu (BIDU) last week suggested that online searches for COVID symptoms and treatment had fallen sharply in the previous two weeks, while traffic activity rebounded. One recent study forecast that new cases could peak by midmonth.

As movement resumes across China, the consumer sector stands to benefit, experts said -- at least in the short term.

"I expect we'll get a temporary rebound in consumption as a part of the forced savings Chinese households accumulated during the COVID lockdowns are spent. This in turn should drive up business investment and boost employment (and perhaps wages) in the services sector," said Peking University finance professor Michael Pettis.

"Unfortunately, this will be mostly a one-off, driven by a partial reversal of last year's terrible consumption numbers. Until there is a real attempt to increase the share of GDP retained by households, consumption will still remain too weak to drive growth rates beyond a few months," he told MarketWatch.

Meanwhile, China's traditional engine of growth -- factory activity -- faces even tougher conditions.

Because China's economy is experiencing enormous deflationary pressures and exports are shrinking, authorities will eventually choose to lower interest rates and allow the yuan to depreciate, investment strategy firm BCA Research said in a report.

"Therefore, the industrial sector will face multiple headwinds in the next six months. Exports will contract at a double-digit rate, infrastructure investment will slow and housing construction will stabilize but fail to recover," the authors wrote.

If COVID outbreaks do linger across the country, it is "realistic to expect production to be hampered for a substantial part of 2023," analysts at Rhodium Group said in a separate report.

(END) Dow Jones Newswires

January 18, 2023 07:58 ET (12:58 GMT)