China’s economy expands 3% in 2022 as zero-Covid policy hurts growth

CHINA’S economy grew by 3 per cent in 2022, significantly below its original target of around 5.5 per cent as zero-Covid protocols took a toll on business activity, but analysts expect to see a recovery in 2023 as a result of the reopening and policy stimulus.

According to China’s National Bureau of Statistics, real gross domestic product (GDP) growth declined to 2.9 per cent on year in the final three months of 2022.

While this beat the market consensus of a 1.8 per cent expansion, it is lower than the 3.9 per cent growth recorded in the third quarter.

The bureau attributed the “positive results” to Beijing’s effective containment of the Covid-19 pandemic. 

“The national economy continued to develop despite downward pressure, economic output reached a new level, employment and prices were generally stable, people’s lives were continuously improved, new achievements were secured in high-quality development, and the overall economic and social development was stable and healthy,” it said.

Moody’s Analytics economist Harry Murphy Cruise said China’s fourth quarter was “one of disruption”, and that it was a disappointing end to the year for the world’s second-largest economy.

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Chaoping Zhu, a Shanghai-based global market strategist at JP Morgan Asset Management, said: “This deceleration demonstrated the pressure of uncertainties associated with the Covid-19 on the Chinese economy, first from the zero-Covid policies and then the mass infection.”

In December, cyclical indicators further deteriorated when infection cases quickly peaked after stringent measures were relaxed across the country. 

Retail sales in December fell 1.8 per cent on year, when most people got infected and stayed at home. Food services slumped by 14.1 per cent. 

Industrial production was dragged down by a labour shortage and its growth rate further decreased to 1.3 per cent on year in December, compared to 2.2 per cent in November.

In 2022, the investment in fixed assets rose 5.1 per cent over the previous year, thanks to the government’s infrastructure investment push and monetary easing.

Investment in infrastructure and manufacturing went up 9.4 per cent and 9.1 per cent respectively, while real estate investment fell 10 per cent.

The unemployment rate in cities stood at 5.5 per cent in December, with the jobless rate among young people (16 to 24 years of age) staying high at 16.7 per cent.

Despite the weakness in the last quarter, December might be the bottom of the Chinese growth trajectory in the near term, said analysts.

JP Morgan’s Zhu said that high-frequency indicators are pointing to quick recovery of economic activities, as the infection has probably peaked across China. Last week, subway passenger flows have recovered to 70-80 per cent of pre-Covid levels in Beijing and Shanghai, and even exceeded the level in Shenzhen.

“Looking forward, we expect to see a sustained economic recovery in 2023 as a result of reopening and policy stimulus. Service sectors should be the early beneficiary when pent-up demand is released. Sales of consumer goods might also pick up due to improving confidence and continued policy support,” he said.

Moody’s Analytics’ Cruise said high Covid-19 cases over the upcoming Lunar New Year period would put a lid on the economy’s recovery. But as case numbers eventually retreat and disruptions ease, the economy will gradually gain momentum. 

He said: “But don’t expect growth to rocket. China’s 2023 will be bumpy. Not only will it have to navigate the threat of new Covid-19 waves, but the country’s worsening residential property market and weak global demand for its exports will be significant brakes.”

He expects China’s economy to expand 4.3 per cent through 2023 and improve to 7.1 per cent in 2024 as the reopening’s benefits come to fruition in a greater way.

Zhu said that accommodative policies should remain in place to support business confidence to support the property sector and local government. He expects an additional interest rate cut in the first quarter, followed by liquidity facilities by the People’s Bank of China.

Carlos Casanova, a senior economist of Asia at Union Bancaire Privee, said investors are keen to look past the latest data, and focus on a consumption-led recovery that should take hold from the second quarter of 2023.

“Compounded with a strong favourable base effect, we also envision upside risks to our above consensus 2023 GDP growth forecast of 5.2 per cent for China,” he said.