China - Recovery underway
LNY holiday travel period does not look to have brought serious renewed pandemic disturbances. The way is now paved for a staged recovery in domestic demand and economic growth. Corporate lending picks up, household lending still subdued; early signs of bottoming out real estate.
The initial effect of the U-turn in Covid-19 policy made in December (from the strict Zero-Covid to laisses-faire) was a spiralling of Covid-19 cases adding to disruptions on the supply and demand side, and deepening China’s slowdown in late 2022. However, in line with our view and our 2023 growth upgrade (see our previous monthly update, ) the picture has started to improve from January onwards. With no signs of overwhelming public health concerns and related disturbances following the LNY holiday, we think the way is paved for a staged recovery in domestic demand, with GDP growth strengthening from Q1-2023 onwards.
2022 ended weak, but 2023 started strong
As always around the Lunar New Year, there are fewer Chinese macro data published, as data on industrial production, retail sales, fixed investment, exports/imports and unemployment will be combined for January and February and published in March. That said, the data over January that have been published so far point to a meaningful improvement in activity and sentiment on China’s ‘reopening’. After three years of heavy restrictions, the Chinese were finally able again to travel freely to their hometowns during the Lunar New Year (LNY) period end-January. This had an immediate impact, particularly on ‘fast moving’ services such as transport, tourism and entertainment. The January PMIs also showed an impressive rebound, particularly the services PMIs. After sharp declines in late 2022, the official non-manufacturing PMI jumped by almost 13 points to a 7-month high of 54.4, while Caixin’s services PMI rose to a five-month high of 52.9. The manufacturing PMIs also edged up, but not as spectacular as their services counterparts. With both services and manufacturing PMIs improving, the composite output indices from both NBS and Caixin are now back in positive territory for the first time since summer 2022.
Corporate lending picks up, household lending still subdued – yet some early signs of bottoming out real estate
Bank lending data for January came in much stronger than in previous months, partly reflecting government policies to bolster lending to the property sector and to SMEs. The acceleration in corporate lending and an improvement of business sentiment as illustrated by the PMIs does bode well for private investment, which was very weak last year. By contrast, household demand for mortgage loans was still subdued, suggesting that it takes more time for consumer confidence to recover and home sales to get growing again. Consumer confidence edged up marginally in December (from 85.5 to 88.3), but remained at relatively weak levels. While household deposits held by Chinese financial institutions suggest the built-up of excess savings accelerated last year, part of this reflects movements out of financial assets such as wealth management products; hence, these deposits are overestimating excess savings that are ‘ready for consumption’. All in all, with Zero-Covid behind us, and with more property support filtering through, trust in the real estate sector should gradually return. January home price data already signal a bottoming out of real estate, at least in the largest cities. All of this could help shaping a broader rebound in private consumption, with GDP growth gaining momentum from Q1-2023 onwards.