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How will China’s Economy Benefit from the Pandemic Pivot?

With China’s pandemic-policy direction settled and the reopening gathering pace, this is an opportune time to consider the outlook for its economy.

Asia Pacific Head of Fixed Income, Head of SSGA Singapore

China began dismantling its zero-COVID strategy in December 2022, removing almost all restrictions and reassuring its citizens that the Omicron variant was not as dangerous as anticipated. It also advised that practicing medical self-care at home would be sufficient to manage the virus successfully1. This positive outlook appears to have been realised. According to data from the World Health Organization, COVID cases in China had reached almost 100 million by late March 20232. However, the numbers may have peaked, which is an excellent outcome from both a human and an economic perspective.

China’s Domestic Economy Rebounds, but Global Clouds Remain

Since China’s COVID pivot, consumers have started to unleash their pent-up demand for some of the services that were restricted denied during the pandemic, such as entertainment, dining, and travel. While that is good news for the domestic economy, China’s position as a net exporter means any global economic slowdown triggered by overly aggressive interest-rate hikes could negatively impact its export sector.

Monetary Policy Remains Supportive

China’s monetary policy is out of lockstep with many other developed economies. This is partly because the government is concerned about supporting the economy as it emerges from COVID. Yet, it is also determined to stabilize vulnerabilities in the property sector. While many markets have increased interest rates to dampen inflation, China has sought to boost its economy by reducing borrowing costs3 and the reserve ratio requirements for banks to encourage lending. Presently inflation doesn’t appear to be a challenge for China, with consumer prices in February 2023 increasing at a relatively low annual rate of 1.5%4. However, if, at some point, inflation takes hold, then the government may have to reduce its level of economic support or raise interest rates, but that doesn’t appear likely in the short to medium term.

Local-Currency Bonds Could Benefit from a Federal Reserve Pause

The US Federal Reserve (Fed) remains concerned about inflation and is committed to further interest rate increases during 2023. Despite this, the bond market predicts that the Fed will start reducing interest rates in the latter stages of the year when the economy has slowed enough, and price rises are under control. If this occurs, we should see a lagged benefit flow through and boost China’s export sector. Regarding the broader Asian bond market, a decline in US interest rates should also cause the dollar to weaken. This could increase the relative attractiveness of local-currency-denominated bonds compared to dollar-denominated issuance.

China’s Property Sector – A Boost from Reopening?

The real-estate sector in China was another casualty of COVID as buyers (and sellers) were locked down and concerns grew about the viability of some leading property developers. The government has since moved decisively to support the property segment. This, combined with relatively low interest rates and increasing personal incomes as the economy fully reopens, may ease concerns. In turn, it could potentially trigger a boost in investor confidence and increase the value of bonds issued by property developers. As an early indicator of this, recent price data for residential developments shows only modest year-on-year price declines in certain cities. In contrast, prices in Beijing and Shanghai have actually risen in the past 12 months5.

Spillover Benefits for Regional Markets

China has also relaxed its travel restrictions for inbound and outbound visitors. In March, it was announced that foreigners from all territories could apply for visas to enter China6. In a positive development for the region’s tourism-dependent markets, outbound travel has soared. While travel has not yet recovered to pre-pandemic levels, it is growing strongly.

In addition to a boost from inbound visitors, several Asian territories will be supported by increased demand from China for their mineral and agricultural commodities. Indonesia supplies nickel and other natural resources, while Thailand, the Philippines and Vietnam sell agricultural goods, which will benefit as consumers dine out more7.

The Outlook for China and Asia – Cautious Optimism

Early indications are that China will see its domestic economy rebound strongly with similar consumer demand patterns as seen in other markets as they emerged from restrictions. This sequence favours the consumption of services rather than goods. Accordingly, tourism and entertainment will likely be the primary beneficiaries, while sectors like home delivery, which boomed during COVID, may see demand drop.

China’s reopening should also lift economic growth in the Asian region. A recovery in China’s demand for goods could increase the GDP of many Asia-Pacific economies by about 0.4%8. In a relatively low-growth global economy, this uplift is more vital than it might appear. Asian bonds issued by companies in sectors positively exposed to China’s domestic demand growth should benefit as the outlook brightens.

At the same time, the global outlook remains more volatile and uncertain, with the potential for higher interest rates in the US and Europe triggering a drop in consumer demand for the types of finished goods in which China’s export sector specializes. Despite these headwinds, there remains room for cautious optimism in China and Asia as the impact of the pandemic recedes.

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