China’s scrapping of zero covid and reopening to the world is widely regarded as the most important economic story playing out in 2023. And so far, it is living up to expectations, writes Tom Simpson
With restrictions removed, wave one saw covid spread at an unprecedented speed and scale, with 80% of the population estimated to have been infected with the virus. China’s healthcare system was pushed to new limits with death rates rising through December and early January. However, as Spring Festival approached, official figures indicated hospitalisation rates dropped by 85%, with fears of a second wave of infection triggered by holiday travel ultimately unfounded.
Despite tragedy hitting many families across the country, normality has nevertheless largely returned to life across China. The initial sense of relief at re-opening and fear of the implications of Covid’s unrestricted spread soon turned into a desire to reconnect with family and friends, travel, shop, eat and drink and try to put the last twelve months to the side.
Much of China’s initial rebound in activity was inevitability going to be visible in sectors artificially depressed by restrictions. However, the sharpness of the rebound in travel, leisure and consumption more generally during Spring Festival has exceeded even the most upbeat expectations.
Domestic air travel over Spring Festival was up 50.9% on 2021 though still significantly (47%) lower than 2019 trip volumes according to the Ministry of Transport. Overall, 226 million trips by road, rail, waterway and air were recorded during the week-long national holiday. Meanwhile, revenues in the tourism and hospitality sector over the seven-day period recovered to 80.7% of pre-pandemic levels.
Thailand found itself back at the top of China’s outbound tourism destinations, with two of the three most visited locations being Bangkok and Phuket. Thai visa applications have surged by 300% year-on-year, while purchases of Thai tourism products jumped by 1,000% according to Alibaba.
The cinema box office also sprung back to life, with around $1 billion generated over the seven-day national holiday, aided by a strong line-up of domestic films and beating even 2019 takings. Data from Meituan suggests the recovery of China’s restaurant sector has begun too, with Spring Festival revenues for some chains already recovering to pre-pandemic levels. Immediately following the holiday, the IMF moved to revise their GDP growth projections from 4.4% to 5.2%.
If China’s reopening is the big economic story of 2023, then consumption is taking the lead role. Fuelled by record savings rates and supportive government policies, consumption looks set to have a bumper year as revenge spending kicks in and appears likely to rise over the course of 2023. Consumption has been deemed the primary economic ‘driving force’ as the government seeks to both recover activity in the short term and rebalance the economy over the long term. Foreign producers and exporters of consumable goods with exposure to Chinese consumers are likely to see upticks in demand as a result.
China’s outlook isn’t without risks, and the best case is not lacking in potential headwinds. The real estate sector and its associated industries, which contributed 24.2% of China’s GDP activity in 2019, still presents a significant concern. With private real estate developers in crisis mode and property prices falling in riskier areas such as city outskirts or lower-tier cities, the government will need to continue its balancing act to ensure a deeper crisis is avoided.
Exports are also increasingly in the spotlight despite being a rare bright spot throughout the pandemic, reaching a record surplus of $877.6 billion in 2022. However, October 2022 saw demand fall by -0.3%, before November (-8.7%) and December (-9.9%) saw the rate of contractions accelerate sharply. With growth in overseas markets expected to continue to struggle and demand expected to remain soft in the first half of 2023, China’s exports are likely to continue to struggle.
Whether a bumper first quarter boosted by a rebound in consumption proves to be the catalyst for a return to sustained levels of strong growth is yet to be seen. Headwinds such as real estate and exports will likely drag on growth in 2023. Though with intervention so far avoiding a deeper property crisis and demand for Chinese exports in the global south rising, the potential risks associated may be mitigated. Consumption will be the main driving force for growth, and with the IMF raising its growth projection from 4.4% to 5.2% will play a key role in how the Chinese and global economies perform in 2023.