China's growth story will convince the world once again
Full recovery will take time, but long-term fundamentals still compelling
Nan Li is associate professor of finance at the Antai College of Economics and Management of Shanghai Jiao Tong University. John D. Van Fleet is Antai's director of corporate globalization.
No one in China will soon forget 2022.
The direct cost of COVID lockdowns and testing was enormous, likely running into the hundreds of billions of dollars, and the economic impact was even bigger. Real gross domestic product grew only 3%, which aside from the first year of the pandemic, was the slowest pace of expansion seen in more than four and a half decades. For an $18 trillion economy, this was a big deal.
During the year, foreign multinationals and investors showed reservations about the Chinese economy by working to develop alternative sourcing bases in places like Malaysia and Vietnam and by selling off Chinese securities. By October, the Shanghai Stock Exchange's A-share index was down 25% from a year earlier.
Then in the final month of the year, we witnessed one of the most astonishing policy volte-faces of any government, anywhere in recent times. In a snap, dynamic zero COVID was over.
The end of mass testing and restrictions on movement in turn brought a continental-sized COVID outbreak amid a kind of information void. We have no ability to understand the scale of the outbreak and its effects yet, but it seems that overseas media may be wildly overstating the situation. No surprise there.
We do know that the A-share index has rebounded by about 11% since reaching bottom, roads are becoming more congested, and subways and airports are getting busier. There is a spirit of optimism in the pre-Lunar New Year air.
Major Western investment banks sounded notes of cautious optimism in their 2023 outlook statements, however. Most noted, as they should, the continuing clouds of overvalued real estate assets, local government budget woes and overhanging debt.
The more bullish among them made note of the eye-watering $4.5 trillion in incremental savings that Chinese households amassed during the COVID era, a nest egg greater than the GDP of every country except the U.S., China and Japan.
But there is less here than meets the moist eye expecting a wave of new spending and investment. First, the government has been cleaning up shadow banking, so a massive chunk of cash in off-balance sheet wealth management accounts has simply flown back into bank deposits.
Perhaps more importantly, small and midsize Chinese businesses, which dominate employment and economic activity, were devastated by dynamic zero COVID. With hundreds of thousands of them going out of business, or at least severely impacted, their owners and former employees will not be going on any shopping sprees anytime soon.
While there will be an incremental increase in consumer spending, as we have already seen with travel bookings, this will be a recovery from a low baseline. Spending slowed dramatically in 2022, for obvious reasons. The National Bureau of Statistics' consumer confidence index dropped by more than 25% year-to-year every month between April and December.
Nonetheless, the fundamental macro factors propelling China's economy forward for the medium to long term not only continue, they are gaining strength.
With the benefit of the world's largest market by far for electric vehicles, Chinese companies now dominate EV battery production too. Chinese EV sector companies will inevitably expand their leadership to other regions. Economies of scale at home, subsidies from the government and technological progress have made Chinese electric cars less expensive than those from American and Japanese competitors, which gives them an edge in markets like Southeast Asia and Latin America.
The Chinese government is reducing subsidies for electric vehicle purchases, however, instead turning toward research and development tax credits. This change will favor quality EV players, a good thing for the market overall.
Contemporary Amperex Technology (CATL), the world's biggest EV battery maker, is already committed to not only supplying some of the developed world's most famous auto brands but also to building factories in the U.S., Europe and other markets.
For the manufacturing sector more broadly, quality and technology upgrades, particularly in terms of digital tools, will improve the productivity of labor and capital. Every industry and public service is being affected, from health care to traffic control.
The Chinese consumer class itself is by far the world's largest, yet still growing at a pace exceeded only by India's among large economies. Moreover, young people play an outsized role. In the U.S. and U.K., Generation Z accounts for about 4% of total household spending while in China the figure is 15%.
Selling to these young consumers is a primary reason why overseas multinationals have come to China for the last couple of decades in increasing numbers and why they will stay. China is their best growth story and often their only one.
A longer-term consideration of the fundamentals of the Chinese macroeconomic environment justifies a somewhat higher degree of optimism than the Western investment banks have so far shown for the Year of the Rabbit. It also suggests plenty of opportunities for global collaboration instead of zero-sum rivalries that degrade economic and societal development for everyone.