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Country financeJanuary 30 2023

China reopens with consumer spending boost

Three years after the start of the pandemic, China has dropped its zero-Covid rules and fully reopened its economy. While GDP for 2022 was sluggish, renewed consumer spending forms the basis for recovery in 2023. Kimberley Long reports.
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China reopens with consumer spending boost Bank of America forecasts 5.5% GDP growth for China in 2023. Image: Getty Images

As China emerges from its zero-Covid policy and reopens to travel, there is hope that the country’s economy will be boosted by the return of consumer spending. 

During 2022, China saw a 3% growth in gross domestic product (GDP), falling short of its 5.5% goal. While these figures failed to meet their target, there is hope this will be short lived, with Bank of America (BofA) forecasting 5.5% GDP growth in 2023. S&P Global Ratings agrees with this positive outlook, forecasting China’s retail space to grow 5.8% in 2023, though online sales are expected to decrease slightly as consumers return to physical stores.

Movement in the market is already being seen. Louis Kuijs, Asia-Pacific chief economist at S&P Global Ratings, says: “Since late December we see the daily mobility indicators improving steadily and there is anecdotal evidence that restaurants in large cities are getting busy again. This suggests that the impact of the re-opening on consumption has turned positive. Indeed, we expect that consumption and the overall economy will be improving from January onwards.”

The National Bureau of Statistics of China reported that retail sales for December fell by 1.8% year on year, representing a better performance than had been predicted. Existing government policy is helping to support consumer spending levels. 

Helen Qiao, Greater China chief economist and head of Asia economics at BofA, offers clarity: “The better-than-expected December retail sales growth was mainly boosted by demand for medicines amid the outbreaks and auto purchases before the expiration of tax rebates. However, discretionary consumer goods, such as cosmetics and jewellery, clearly took the brunt. Restaurant spending also slipped further as many people shied away from dining out. This is consistent with our previous expectation that things will likely get worse before getting better.”

New year’s boost

Moving into 2023, there are hopes that January’s Lunar New Year holiday will have offered a boost to consumer spending. BofA Global Research forecasts that China’s consumption has rebounded “faster and sharper than what is suggested by the data of most Asian economies over the past quarters”. 

Miao Ouyang, Greater China economist at BofA, estimates that Chinese households have collectively built up close to Rmb6tn ($884.4bn) of excess savings in 2022 during the Covid restrictions and property market downturn. 

“We expect more than Rmb1tn of those excess savings could be unleashed rapidly in 2023 to support the release of pent-up demand. The initial pent-up spending should also help improve employment and income growth, kicking off a positive feedback loop to support further consumption recovery,” she says. 

The growth is unlikely to be hampered by monetary factors. BofA Global Research states that China will not face the issues of inflation or financial conditions tightening that have been experienced in other markets. It predicts that “China’s consumer price index inflation will likely pick up but remain modest this year, while Chinese policy-makers will probably maintain an accommodative stance on fiscal and monetary policy”.

Residual issues

Even with these reasons to be hopeful, the country still has many issues to contend with, not least its growing elderly demographic coupled with the first signs of population decline in 60 years.

Labour market figures may also impact consumption levels, with an urban unemployment rate in December 2022 of 5.5%, which remains higher than pre-Covid levels. Ms Qiao explains that “disposable income growth also stayed weak during the fourth quarter of 2022. As the labour market is a lagging indicator, it may take a bit more time to recover.” 

Existing issues in the real estate sector will also weigh down growth. Ms Ouyang adds that while the property market may cease to be a major drag on the economy in 2023, given the recent bump in policy easing, it is likely not to return to growth either. “This could cap the investment growth and recovery of many property-related sectors in 2023,” she says. 

S&P’s Mr Kuijs explains that the first quarter of this year may be impacted by the final quarter of the last. “China's disappointing fourth quarter data implies unfavourable ‘carry-over’ for 2023 GDP growth, as the worse-than-expected fourth-quarter GDP data implies 0.7 percentage points less average growth in 2023, compared to our earlier projection.” 

He adds that China’s speedy Covid policy shift in late 2022 brought forward the recovery of domestic demand, especially private consumption. Mr Kuijs concludes that “in all, we believe the economy remains on track for around 5% GDP growth in 2023”.

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Kimberley Long is the Asia editor at The Banker. She joined from Euromoney, where she spent four years as transaction services editor. She has a BA in English Language and Literature from the University of Liverpool, and an MA in Print Journalism from the University of Sheffield. Between degrees she spent a year teaching English in Japan as part of the JET Programme.
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