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China’s gradual economic healing

Qian Wang, Asia-Pacific chief economist, on why China growth won’t likely boost regional economies as in the past.
Transcript

Qian Wang: The story of Asia-Pacific economies in 2023 has been one of “less”: less tight labor markets and less inflationary pressure than in other regions, which has allowed central banks in this region to be less aggressive in hiking interest rates. As a result, Australia and Japan face a lower chance of recession than in other developed markets.

China’s economy heavily influences this region. We’ve seen a rapid recovery after China’s breakneck reopening from the pandemic late last year. Especially, we see the recovery is particularly strong in the service sector. However, we don’t believe China can maintain its better-than-expected first-quarter pace of growth.

Pent-up demand will eventually fade, and it will take time for a more broad-based healing of private-sector balance sheets and confidence, which has been damaged by three years of COVID and policy uncertainties.

As a result, we expect the pace of China’s recovery to slow quite notably in the near term but pick up again later this year with continued improvement in the labor market, income growth, and some additional policy support.

We believe that China’s economy will grow in 2023 by more than the government’s target of “around 5%,” largely because of a low base in 2022.

At the start of the year, we had foreseen GDP growth of around 4.5%, with the risk to the upside. Now, our forecast is higher, but the risk has shifted to the downside.

Intensifying external headwinds, a structural housing downturn, and weak household fundamentals and business confidence will continue to weigh on our outlook. With some success already being made toward meeting its growth target, which in our view is a bit conservative, policy support for China’s economy could fall short of expectations.

Now, China’s economy’s rebound reduces the chance of global recession. After all, China is already 20% of the global GDP. But the global spillover benefit will be more muted given the services-led nature of the recovery.

Some Asian neighbors could benefit from a rebound in Chinese tourism, but China’s recovery is unlikely to boost up goods or commodities demand to the extent that we have seen in the past.

The implications for global inflation are rather mixed. Stronger China services demand would be inflationary. But China’s economic normalization stands to reduce the risk of global supply chain disruption, and this will continue to help stabilize global goods inflation.