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What will happen to China's economy in 2023? Should we worry about our investments or will we finally see growth?

Jamie Cameron
2. 1. 2023
6 min read

China has abandoned its zero Covid policy. What will the economy look like in 2023? That is a question that has been plaguing many investors who invest in local stocks. Will we finally see an improvement or is the worst yet to come?

As China moves ever closer to fully recovering from three years of government-imposed Covid isolation and reintegrating with the world, economic expectations are high. But will they be met?

Beijing's recent departure from its strict zero covid strategy, which has long stifled businesses, is expected to add vitality to the world's second-largest economy next year.

Covid lockdowns and border restrictions have left China out of sync with the rest of the world, disrupting supply chains and damaging the flow of trade and investment, which does not bode well for companies outside China that depend on China or have factories there directly.

With the global economy facing significant challenges today, including expensive energy, slowing growth and high inflation, China's reopening could provide a much-needed and timely boost.

However, the process of reopening is likely to be erratic and painful, economists say, as the country's economy will be in for a bumpy ride in the early months of 2023.

The main problem will be the historic decline in China's property prices and a potential global recession.

The property market

China's haphazard reopening is not the only factor dragging on the economy. In 2023, experts will continue to watch as policymakers attempt to fix the country's ailing real estate sector, which accounts for nearly 30% of GDP.

The crisis in the sector - which began in late 2021 when several major developers defaulted on their debts - has delayed or halted the construction of pre-sold homes across the country. That sparked a rare outcry this year from homebuyers who refused to pay mortgages on unfinished homes.

While Beijing has made a number of attempts to rescue the sector - including unveiling a 16-point plan last month to ease the credit crunch - the statistics still paint a grim picture.

The value of property sales fell by more than 26% in the first 11 months of this year. Investment in the sector fell by 9.8%.

Is there a solution?

China is trying to crack down on the problem. How, you ask? The answer is to cap property prices. But is this an adequate solution?

Chinese cities are stepping up efforts to control one of the biggest problems in the country's post-pandemic economy: out-of-control housing prices.

The southern city of Shenzhen, where a modest apartment typically costs more than $1 million, is emerging as a battleground. In recent months, officials there have tried a number of tactics to curb speculation and keep price appreciation in check.

Among the most aggressive is a plan to control the resale value of homes by setting benchmark prices for banks to follow when approving mortgage loans.

Under the new rules, maximum prices were set by the authorities in an 84-page document published in February that lists more than 3,500 development projects across the city. Several banks have pledged to restrict financing for properties whose sale prices exceed the prescribed values.

Buyers could pay more if they wanted to, but that would mean spending more upfront on down payments, potentially limiting demand. Several large online property listing platforms have also removed the advertised prices of existing homes and replaced them with government guide prices.

Back to the economic problems 👇

"In the short term, I believe China's economy is likely to see more chaos than progress, for a simple reason: China is ill-prepared to deal with Covid," said Bo Zhuang, chief sovereign analyst at Loomis, Sayles & Company, a Boston-based investment firm.

For nearly three years, China has stuck to its zero-tolerance approach to the virus, even though the policy has caused unprecedented economic damage and widespread frustration. By 2022, growth has slowed sharply, corporate profits have collapsed and youth unemployment has risen to record levels.

Amid growing public unrest and financial pressure, the government abruptly reversed course this month, essentially abandoning zero Covid.

While the easing of restrictions is a long-awaited relief for many, its sudden nature caught the public off guard and left them largely on their own.

"At the initial stage, I believe the reopening may unleash a wave of Covid cases that could overwhelm the healthcare system and stifle consumption and production in the process," Zhuang said.

The rapid spread of the infection has already driven many people indoors and emptied stores and restaurants. Factories and companies have also been forced to close or cut back production as more workers fall ill.

"Living with covid will be more difficult than many anticipate," said analysts at Capital Economics.

Analysts expect China's economy to contract 0.8% in the first quarter of 2023 and recover in the second quarter.

🚨 Other experts, on the other hand, expect the economy to recover after March. In a recent research report, economists at HSBC predicted a 0.5% decline in the first quarter, but overall growth of 5% for 2023. 🚨

Fears of a global recession

A potential global recession is another key concern that will shape China's economic landscape in 2023.

Trade drove most of China's economic growth earlier this year as exports were boosted by rising prices for the country's goods and a weaker currency.

But in recent months, the trade sector - which accounts for about a fifth of China's GDP and supplies about 180 million jobs - has begun to show cracks as a result of the global economic slowdown.

Last month, China's outbound shipments fell 8.7% from a year earlier, much worse than October's 0.3% drop. It marked the worst performance since February 2020, when China's economy almost ground to a halt amid the initial coronavirus outbreak.

Countries around the world are facing recession as policymakers continue to raise interest rates to fight rising inflation.

"Chinese exports have already reversed much of their pandemic boom," said analysts at Capital Economics.

"But the looming global recession means they will likely have to fall further over the next few quarters."

  • How do you see it?
  • Will 2023 be the year China's economy strengthens again?
  • Can the regime there deal with the potential risks and the tight property market?

Please note that this is not financial advice. Every investment must undergo a thorough analysis.

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