Year of the Rabbit could bring hope as China fully reopens after Covid

the rabbit is a symbol of longevity, peace and prosperity in Chinese culture.

The prospect of a better year ahead is certainly something investors in the region will be hoping for. China had a difficult 2022 with tightening tech sector regulations, a property building crisis that curbed investment, and strict Covid-19 restrictions that dampened consumption. As a result, growth levels achieved in the year will likely be significantly below the annual target of 5.5%.

At the end of last year Chinese authorities offered some “hope” for growth by terminating its three years of zero-Covid restrictions and lifting almost all constraints that damaged the property sector. These coordinated policy responses led economists to increase their GDP forecasts for the year ahead, with China likely to be the only major economy to grow faster in 2023 than in 2022 (the forecasted growth rate is 4.8 per cent in 2023, against 3% for last year).

At the upcoming National People’s Congress in March the government may decide to set a growth target of 5% for 2023. The target needs

to be ambitious enough to boost confidence, particularly when growth is deteriorating in many regions. But it must also remain realistic to avoid two consecutive years of growth disappointment.

One area of concern is a surge in Covid-19 cases. Since restrictions have been lifted there has been an exponential rise in infections. While accurate data is hard to source, a number of local governments have estimated 60-85% of their population contracted Covid-19 in December. As this wave of infections escalates – with people moving around the country for the Lunar New Year – it will put enormous strain on already pressured hospitals, particularly as medical shortages continue across major cities. The faster-than-expected easing of restrictions will therefore initially be disruptive to the recovery, as shown by recent economic indicators.

Nevertheless, with Covid-19 restrictions removed and with continued support for the property market, the Chinese economy should accelerate in the second quarter of the year, especially if the current wave of infections subsides, allowing activity to pick up. That said,

a repeat of the V-shaped recovery seen in 2021 after the initial Covid-19 shock should not

be expected as the property market will take longer to recover and gain investor confidence.

What about inflation? Many economies around the world have had to deal with spiralling inflation throughout 2022, albeit China is the outlier with the most recent consumer price index in December rising at 1.8% (year-on-year). As China advances the easing of Covid restrictions, inflation will potentially accelerate due to pent-up demand and government growth policies. It could easily accelerate beyond the official target of 3% in 2023, similar to what happened in other major economies after reopening.

Chinese households are cash rich, demand will be tilted towards consumption, and a decent rebound in retail sales is likely, given the last print in November was a decline of 5.9%

(year-on-year). There are already signs of this pent-up demand as bookings for international travel have surged.

China re-opening will undoubtedly cause higher inflation, and many western central bankers will be wary of this. However, the impact of that re-opening should have limited impact on global inflation.

Whilst there will also be a need for more energy from China; Chinese imports of crude oil and liquefied natural gas are already back to pre-pandemic levels. China is a large consumer

of commodities and there has already been a surge in iron ore, up more than 40% since bottoming in late October 2022. Any further resurgence in commodities will depend heavily on how China stimulates the economy, and it is somehow difficult to envisage a resurgence in construction in the short term, which should limit commodity upside.

Ultimately the speed of easing of coronavirus restrictions has surprised many, and it seems China is prioritising growth above all else.

In terms of prosperity at least, the Year

of the Rabbit may well bring some welcome respite.

Gareth Gettinby is investment manager, multi asset and solutions, at Aegon Asset Management.