Policy in focus as dust settles on reopening in China

Our 2023 growth forecast of 4.5% for China is still 6-tenths below the consensus’ 5.1%, owing to a more cautious view on net exports and private consumption. It is also much lower than the five-year average pre-pandemic growth pace of 6.7%. So, notwithstanding the cyclical turnaround this year, growth will stay on its path of structural decline.

What you will learn:

• We expect the authorities to set the growth target to “above 5%” this year, but reaching this goal in reality will require accommodative policies to be effective in feeding through to the real economy in a timely manner. However, our own analyses suggest that China’s fiscal multiplier and monetary policy transmission mechanisms have weakened over the last three years.
• Still, available data for the first two months of this year suggest that broad measures of mobility and credit growth have picked up pace and surprised to the upside, underscoring some upside risk to our near-term forecast. However, trade data from China’s North Asian peers still suggest weak mainland demand and an increasingly challenging external backdrop. In any case, we still think that the recovery will show a much clearer rebound in Q2 and Q3, before a tapering off of reopening tailwinds towards the end of the year.
• Underpinning our forecast is the assumption of relatively targeted policy accommodation in 2023. In our view, a “proactive” fiscal policy likely entails targeted industry support (in the form of regulatory easing, among others) as well as off-balance sheet infrastructure spending, with the authorities aware of the fiscal risks associated with a broad stimulus package. “Precise and forceful” monetary policy will include reverting to various structural policy tools such as relending, while keeping liquidity conditions ample in the absence of interest rate cuts.