Overview

• The sudden reversal of public health policy in December – abandoning zero-COVID policies – resulted in considerable disruption, as the rapid spread of the virus led to labour shortages (both due to new infections and self-isolation) across the economy. The mass movement of people during the Chinese new year holidays risks further COVID-19 cases in the near term. That said, the end of economically-restrictive zero-COVID policies should provide a boost to growth once China is through this volatile transition period. It remains to be seen whether fiscal and monetary policies will be effective in supporting growth in consumption. We have revised our forecast for 2023 higher – to 5.4% (5.2% previously) – as authorities eased zero-COVID policies more rapidly than expected. Our forecast for 2024 is unchanged at 4.5%.
• China’s economy grew more slowly in Q4, reflecting the impact of the latest COVID-19 wave, disruptions related to the end of zero-COVID public health policies and reduced base effects (compared with Q3). Headline GDP increased by 2.9% yoy but recorded no growth in quarter-on-quarter terms. For the full year, China’s economy grew by 3.0% – marginally weaker than our forecast (3.1%). This was the second weakest rate of growth (after the 2.2% increase in 2020) since the end of the Cultural Revolution in 1976. Growth remained imbalanced – driven by the old model of industrial output and exports, rather than domestic consumption (which was constrained by the impact of zero-COVID policies).
• China’s industrial production grew more slowly in December – reflecting the impact of the recent COVID-19 trends (both in terms of spread and policy) on producers. Output rose by 1.3% yoy (down from 2.2% yoy previously).
• There remains a sizeable divergence in nominal investment trends between state-owned enterprises (SOEs) and the private sector. Investment by SOEs rose by 9.0% yoy in December, compared with a modest 0.1% yoy increase from private firms.
• China’s trade surplus was marginally higher in December, reflecting a modest month-on-month rise in the value of exports. The trade surplus totalled US$78.0 billion (up from US$69.2 billion in November). Although this surplus was below the peaks seen in mid-2022, it remained high by historical standards.
• The fall in real retail sales was comparatively modest in December – 3.7% yoy (compared with a 7.6% yoy decline previously) – a somewhat surprising outcome given the impact of the COVID-19 wave.
• New credit issuance increased by 1.4% to RMB 31.8 trillion in 2022. Overall, credit growth was rapid in the first half, before contracting for the bulk of the second half of the year.
• The PBoC has held its main policy rate – the Loan Prime Rate – unchanged since August 2022. There remain substantial risks around monetary stimulus – given the apparent weakness in credit demand (which may improve once China moves through its transition away from zero-COVID) and the imbalance with tighter monetary policy in advanced economies – which risks capital flight that could destabilise China’s financial sector.

For further details, please see China’s economy at a glance (January 2023)