Blog | 02 Feb 2023
China’s bounce-back from Covid has no clear driver
Head of APAC Economics
With Covid-related restrictions now removed, the Chinese economy is due for a bounce. In consensus thinking, much of that uptick is expected to come from private consumption. The question then becomes one of how strong and how sustained the likely pick-up will be.
In our view, the rise in private consumption is likely to be much less than what is currently in consensus thinking and hence economic growth in 2023 is likely to be more modest than what many expect. Our forecast is for the economy to grow by 4.5% while many expect a pace between 5%-5.5%.
We differ from consensus on two important counts. The first is on exports, where we expect a contraction of more than 9% this year while consensus expects about a 1.5% decline (in nominal dollar terms). This has more to do with a difference in our global growth expectations than with anything within the Chinese economy. In any case, the gap in net exports (exports less imports) is much more modest.
The larger difference comes in expectations around how private consumption is likely to behave. The consensus belief is about a relatively robust pick up, fuelled by pent up demand and financed by an excess of savings as exemplified by a rise in households’ banking deposits.
We are not so sure it is going to play out quite like that. First, while the private savings rate has increased by four percentage points (by our estimates), much of this has gone to people with office jobs, or the relatively well-off. These people are unlikely to run down their savings meaningfully as their propensity to consume is both stable and not particularly high. The savings rate among people with a high propensity to consume, especially in rural areas, has not gone up (see Figure 1). In short, there isn’t a lot of excess savings to spend.
Second, there is still a fair amount of uncertainty about the outlook and so precautionary savings are likely to remain high. Yes, there is pent-up demand and there should be an initial burst of expenditure but, as we have observed in other places, it is unlikely to sustain itself.
Third, with international movement restrictions now eased, outbound tourism from China is likely to pick up, meaning that at least some of the excess savings are likely to be spent abroad. There will be inbound tourism, but this is typically much less than the outbound numbers. Under current circumstances, it should be even lower as people outside China have exhausted a lot of pent-up demand for travel.
Four, the fiscal deficit has widened and there may be a need for consolidation. As we have seen in Singapore and Korea, there is the possibility that taxes may rise in the near future. Even if taxes do not increase, consolidation may come via a slowdown in the growth of benefits. Assuming a certain amount of foresight on the part of consumers, that could affect current expenditure.
Lastly, looking at solely at financial savings may not provide a complete picture on overall savings. Bank deposits have gone up, but given property sector issues, this may simply be money that would otherwise have gone toward housing.
Most likely, the post opening-up path we will see in China will mimic the path we have seen in other Asian countries: an initial bounce that reverts to its fundamentals, or an economy that will struggle as its two main engines of growth—investment and exports—face challenges. That likely means a sub-5% growth rate in 2023.
Head of APAC Economics
Head of APAC Economics
Arup Raha is the Head of APAC Economics at Oxford Economics. He leads a strong 10-member team with responsibility for the coverage of several Asian economies, including China, Japan and India. Arup started his career as an economist with the World Bank in Washington DC and then went on to build a successful career in the financial services industry. Arup has previously been the Chief Economist for Asia-Pacific for 3 global banks, namely UBS, Citi and HSBC and has also been the Head of India Equity Research for JP Morgan. Arup has a B.A. (Honors) in Economics from St Stephen’s College, Delhi, a M.A. in Economics from the Delhi School of Economics, and a Ph.D in Economics from Vanderbilt University in the US.
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