No return to normal yet

In the past, China has been a regular global outperformer, with +9.0% growth on average over 2000-2019 and +7.7% over 2010-2019. In 2020, at the height of the global Covid-19 pandemic, China was one of very few economies spared by a recession (+2.2%), thanks to resilient exports and a swift policy reaction that ensured a quick rebound. 2021 was characterized by strong growth (+8.1%), and in this context authorities felt comfortable to tighten and to start normalizing the policy mix. This led to a cooling of the Chinese economy, exacerbated by energy shortages along with default concerns in the real estate sector in Q4 2021. The economic momentum took a turn for the worse in H1 2022 as the government put in place stringent controls (partial or full lockdowns of cities) to contain the spread of the omicron variant. GDP contracted by -2.6% q/q in Q2 2022, and growth remained slow thereafter as continued strict Covid-19 control measures weigh on household and business confidence. We expect China’s GDP to grow by +2.9% in 2022, followed by a mild recovery to +4.5% in 2023. Insolvencies are likely to register another year of decline in 2022, before a moderate increase in 2023 (but they should remain well below the pre-pandemic number).

Broad policy support against the Covid-19 crisis in 2020 had a quick positive impact on policy-driven industries (infrastructure, real estate), while the private sector and manufacturing investment became clearer growth drivers at the beginning of 2021. With the focus turning to long-term vulnerabilities, authorities reined in policy support in 2021. As cyclical conditions worsened in 2022, the policy mix has been eased again, with accelerated government spending and more accommodative funding conditions. However, the extent of the stimulus will remain small compared to the past, and a notable difference is that housing policies are unlikely to be significantly eased. This is because authorities are keeping an eye on the long-term: China needs to deal with a large level of debt, amounting to nearly 300% of GDP in total (c.75% public debt, c.60% household debt and c.165% corporate debt). Externally, indicators look better: external debt is generally low, FX reserves are largely sufficient, China’s export market share is higher than before the Covid-19 crisis and the current account should remain in slight surplus in the coming few years. Risks remain nonetheless, notably related to tensions with the US.

China’s business environment is about at the median in our assessment of 185 economies, having gradually improved over the past few years. The Heritage Foundation’s ‘Index of Economic Freedom’ survey 2021 assigns China rank 107 out of 184 economies (up from rank 144 in the 2016 survey), reflecting good scores with regards to business freedom, tax burden, judicial effectiveness and trade freedom, though weaknesses remain in particular with regards to investment freedom and financial freedom. Meanwhile, the World Bank Institute’s annual ‘Worldwide Governance Indicators’ survey indicate that the rule of law and measures to combat corruption have all improved since 2016. Our proprietary ‘Environmental Sustainability Index’ puts China at rank 178 out of 210 economies, reflecting strengths in water stress and energy use per GDP, but weaknesses in terms of the recycling rate, climate change vulnerability and renewable electricity output.