Executive Summary

We expect the Chinese economy to rebound this year and forecast an annual growth rate of 5.1 percent. China’s exit from zero-COVID is the key facilitator behind this rebound, with high-frequency data (e.g., traffic and human mobility) suggesting that domestic demand has started recovering. This also allowed for a release of pent-up demand during the Spring Festival holidays at the end of January.

Insights for What’s Ahead:

• Status of China’s Economic Recovery – Independent studies, information from health authorities, and high-frequency data suggest that the most recent wave of COVID-19 infections has already peaked in most parts of China. This should facilitate a continued recovery in consumption. In fact, data from the State Taxation Administration shows that, during the weeklong 2023 Spring Festival holidays, (January 21-27)  sales revenue of consumption-related sectors grew, on average, 12.2 percent compared to the 2022 Spring Festival holidays, and 12.4 percent compared to the 2019 holidays. But headwinds remain, including confidence weakness and the property downturn. Also, the negative impact of the pandemic on industrial production was still manifest in December, and the outlook remains challenging given the slowdown of external demand. 
• Investment Trends – December saw an uptick in Fixed Asset Investment (FAI) growth thanks in great part to policy incentives, but also because of the low base effect from December 2022. Demand fundamentals for manufacturing and housing sectors are likely to stay unfavorable over the short term, so we expect fixed investment growth in 2023 to remain dependent on policy stimulus. 
• Consumption Trends – Retail sales growth in December unexpectedly improved as it was braced by some temporary drivers including medicine stock and front-loaded car purchases. Household spending is expected to rebound in 2023, but the strength and sustainability of it will depend, primarily, on a recovery in confidence levels, which in turn will be affected by the strength of the job market recovery and income growth, as well as the stabilization of the housing market. High inflation and broad labor shortages are not anticipated in 2023. 
• Trade Trends – China’s exports contracted -9.9 percent YoY in December. Despite the sharp contraction in Q4, annual export growth still came at 7 percent in 2022. We expect a substantial decline in external demand in 2023 given the worsening global economy, as a result of which China’s export growth in 2023 is likely to be negative. To offset the impact that this will have on China’s manufacturing sector – a large part of which is export-oriented – we expect authorities to implement policy measures to expand domestic demand in 2023.