2022 was a challenging year for China, not only due to its economy but also in social and political terms. The controversial decision to maintain a zero-COVID policy focused on mass testing and localized quarantines played a central part in it. However, the elimination of this policy implies a 180-degree turnaround for 2023. As a strategic country for global growth, understanding the expectations for China is crucial, particularly for a year with a forecast of a pronounced deceleration.
Real Estate and Technology
It is worth remembering that, along with the zero-COVID program, the Chinese government had also taken steps to increase its control over the technology and real estate sectors before the pandemic hit.
In August 2020, the “three red lines” policy was introduced after the crisis at the property developer Evergrande. Under this policy, liabilities cannot exceed 70% of assets, the net debt-to-equity ratio must be below 100%, and cash reserves must represent at least 100% of the short-term debt. It also involved the cancellation of Jack Ma’s Ant Group IPO.
Chart 1: own elaboration. World Bank data.
Xi Jinping’s new discourse is that the regulatory tightening has ended, as reflected by easing the “three red lines” application on the real estate sector, which accounts for about 25% of the country’s growth. Likewise, there seems to be a comeback in the support for the technology industry, which has been vital in maintaining growth levels between 6 and 8%, as seen in Chart 1.
However, the World Bank’s October projections show that this track will be reduced to around 4.5 % for the next few years. Against a 3.21% projection, the previous week’s release displayed a 3.0% growth for 2022 versus 2021’s 8.08%, affected precisely by the zero-COVID policy and the lockdowns resulting thereof. China’s expected growth for 2023 is 4.44%, whereas the global projection is 2.65%, 0.655% for the EU, 0.99% for the US, and 0.81% for the G7.
The Political Scenario
In China, the political atmosphere is always a variable to consider, a fact that is probably clearer for Xi Jinping’s third term, as power has become even more centralized around him after the last election. The implementation of the zero-COVID policy led to profound social unrest, which, combined with the country’s economic deceleration, has led to a shift in the strategy. This new course involves promoting what he has called quality growth and risk control, focused precisely on controlling the risks of the financial system, preventing pandemics, and improving the capacity for self-sufficiency and advancement in the technological field.
Chart 2: own elaboration. Investing data
The PMI index, calculated from a monthly survey of sales managers on incoming purchase orders, allows for close monitoring of the outlook for Chinese companies. Chart 2 shows the index’s performance for the manufacturing industry and the composite, which combines this sector with the services industry. While the manufacturing industry has shown a lateral trend since September 2021, the fact that it has remained below 50 is also remarkable. Under the index’s methodology, this indicates that this sector has been in contraction for more than a year.
However, when reviewing the index in its entirety, the situation is different. Even though it has remained above 50 in most cases, a downward trend can be seen since June, which implies that the service sector is losing strength. This reaffirms the loss of dynamism in the Chinese economy, which has, in turn, led to a change in the government’s stance.
Remember Taiwan
Taiwan and its apparent proximity to the US remains one of the crucial factors behind China’s decision-making, especially concerning technology companies.
The semiconductor market has had and will continue to show significant growth as demand increases due to its increased use in products ranging from computers to cars. The expectations are that it will be a trillion-dollar industry by the end of this decade, controlled by three companies: Intel, Samsung, and Taiwan Semiconductor Manufacturing Company – TSMC.
As a result, China’s interest in what it has called its rogue province is political, historical, and also strategic for its technology sector.
By the end of the day, the markets were optimistic about the Chinese government’s announcements. In particular, technology companies have shown an upward trend in the Hong Kong and Shanghai indexes, which between December 23 and January 13, have registered increases of 4.91% and 10.95%, respectively.
In addition, a substantial amount of the social tensions were affecting the island of Hong Kong, so this new optimism has had a more significant impact there.
Chart 3: own elaboration. Investing data
Before getting the party started, however, it should be kept in mind that although the Chinese government has undertaken this change in its political stance, continuity will be required for this optimism to endure. However, since power is becoming more and more concentrated in the hands of Xi Jinping, possible changes will be difficult to foresee.
This report was prepared by Gandini Análisis for Supra Brokers for informational purposes only and should not be construed as investment advice.
