China inching toward reopening

Summary

Chinese authorities have taken steps to reopen the economy, and while these policy adjustments are progress towards a lighter-touch approach to COVID, we continue to believe Zero-COVID will be the overarching policy in China for the time being. In that sense, we maintain our below-consensus GDP forecasts for 2022 as well as 2023. However, we acknowledge that risks around our base case scenario forecasts are now tilted to the upside. In the coming weeks and months, should China continue to take steps towards fully reopening its economy, our forecasts could change rather meaningfully

Upside risks starting to take shape

For all of 2022, we have highlighted the uninspiring growth prospects for China's economy. Persistent implementation of Zero-COVID policies and a deteriorating real estate sector have placed significant downward pressure on sentiment and economic activity over the last 11 months. Given these dynamics, we believe China's economy is on track to grow just 3% this year. Aside from the initial COVID shock in 2020, 3% growth would represent the slowest pace of economic expansion since the power struggle surrounding Mao's death in 1976. Growth prospects for 2023 are not much more robust. While we forecast annual growth of 4.9% next year, the majority of the rebound comes from base effects, not from an assumption of renewed robust economic activity. As of now, our 2022 and 2023 annual GDP growth forecasts are below consensus, a position we feel comfortable taking at the current juncture. Underpinning our below-consensus growth outlook is an assumption that Zero-COVID policies remain in place through all of 2023. With that said, upside risks to our forecasts may be starting to build as Chinese authorities could be inching towards taking more meaningful steps to gradually re-open the economy.

While the situation remains fluid, especially as Chinese authorities have at times communicated contradicting messages, on balance, COVID restrictions do appear to be easing. Over the last few weeks, authorities have shortened quarantine times for close contacts as well as eliminated “circuit breaker” travel measures–which were designed to penalize airlines should they carry infected passengers into China. More recently, China has been hit by demonstrations against Zero-COVID and the harsh lockdowns designed to prevent the spread of the virus. These protests, while mostly peaceful in nature, have spread nationwide and have prompted Chinese authorities to make additional, yet modest, adjustments to COVID control measures. To that point, quarantine times for infected individuals have been reduced in select provinces and cities, and in certain locations home isolation has been permitted rather than designated quarantine locations. PCR test requirements in major cities such as Shanghai and key manufacturing cities have also been lifted for outdoor public gatherings. Perhaps most notable, in response to protests government officials have acknowledged the need to improve the local vaccination effort, especially amongst the elderly population. A commitment to improve vaccine distribution amongst the most vulnerable populations, in our view, is an indication that China is stepping up attempts to reopen its economy.

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