China Economy – Growth further slowed, but may gradually pick up ahead

1Dec2022 CMBInternationalGlobalMarkets|EquityResearch|EconomicsPerspective ChinaEconomy Growthfurtherslowed,butmaygraduallypickupahead BingnanYE,Ph.D(852)37618967yebingnan@cmbi.com.hk index(%) 656055504540353025 2019202020212022 ManufacturingPMIConstructionPMIServicePMI Source:Wind,CMBIGM index(%) 5553514947454341393735 2019202020212022 PMIoflargeenterprisesPMIofmediumenterprisesPMIofsmallenterprises Source:Wind,CMBIGM China’seconomicactivityandbusinesssentimentfurtherdeterioratedinNovemberasPMIdroppedtothelowestlevelsincethisMay.Housingmarket,retailsalesandserviceoutputallweakenedbecauseofstricterlockdownsincitiesandtownsaftertheresurgenceofCovidcases.Meanwhile,exportsalsoslowedsharplyasoverseasrecessionincreased.Asthe4Q22growthismuchweakerthanexpected,werevisedowntheGDPgrowthforecastfor2022from3.3%to3%.LowerbasemakesitlessdifficultforChinatoachieveitsGDPgrowthtargetataround5%in2023.Wemaintaintheforecastfor2023and2024respectivelyat4.9%and4.5%.Newcabinetleadersshouldfocusonpro-growthwithreopeningofeconomy,easingmacropoliciesandpro-businessstance.Chinawillseeagradualresumptionwithamildreflationafterthereopeningofitseconomy. EconomicactivityandbusinesssentimentsharplydeterioratedinNovember.China’sPMIinmanufacturingandservicerespectivelydecreasedfrom49.2%and47%inOctoberto48%and45.1%inNovember,whichwerethelowestlevelssincethisMay.Neworderandbusinesssentimentalldeteriorated.Neworderindexinmanufacturing&servicedroppedfrom48.1%and41.7%to46.4%and41.4%.Meanwhile,businesssentimentindexinthetwosectorsdeclinedto46.7%and47.1%from47.6%and47.9%. Thedeteriorationofeconomy&businessconditionwasduetodomesticlockdownsandoverseasrecessionrisk.InfaceoftheresurgenceofCovidcases,mostlocalgovernmentstightenedzerocovidpolicywithstricterlockdowns.About50%ofthelargest40citiessawadeteriorationoftrafficflow,passengerflowandcustomerflowinthepastfewweeks.Therefore,bothretailsalesandserviceoutputmayhavefurtherdeclinedinNovember.SmallbusinesswasmorevulnerableasthePMIofsmallenterprisesdroppedtothelowestlevelsinceMarch2020.Atthesametime,overseasrecessionriskincreasedwithaninvertedyieldcurveinglobalbondmarketanddownwardpressureinearningforecastforstocks.Therefore,China’sexportorderindexexperiencedanoticeabledeclinefrom47.6%inOctoberto46.7%inNovember. WerevisedowntheGDPgrowthforecastfor2022from3.3%to3%andmaintaintheforecastfor2023and2024respectivelyat4.9%and4.5%.Aseconomicactivityismuchweakerthanexpectedin4Q22,werevisedowntheGDPgrowthforecastfor2022from3.3%to3%.AlowerbaseshouldmakeitlessdifficultforChinatoachieveitsGDPgrowthtargetataround5%in2023.However,challengesarestilltherefor2023astheresumptionofhousingmarketanddurableconsumptionshouldbegradualwhileoverseaseconomyislikelytoseearecession.WemaintaintheGDPgrowthforecastfor2023and2024respectivelyat4.9%and4.5%. Newcabinetleadersshouldfocusonpro-growthwithreopeningofeconomy,easingmacropoliciesandpro-businessstance.Webelievenewcabinetleaderswillfocusonpro-growthin2023.First,Chinahastoreopenitseconomy.ChinahasalreadyadjusteditszeroCovidpolicyrecently.Itmaytakeafewmonthsforpeopletoadapttothenewstage,butnotforlong.AftertheChineseNewYearholiday,citiesandtownsmayfacetheriskof PLEASEREADTHEANALYSTCERTIFICATIONANDIMPORTANTDISCLOSURESONLASTPAGE1 MOREREPORTSFROMBLOOMBERG:RESPCMBR<GO>ORhttp://www.cmbi.com.hk large-scalespreadofCovidvirusaspeopletravel,gatherandvisiteachotherintheseason.Chinahastoprepareforthisscenario.Second,Chinawillmaintaineasingmacropolicies.Monetarypolicyshouldremainprudentwitheasingbias.ThePBOCwillmaintaineasingliquidityandcreditpolicywithadditionalRRRandLPRcuts.Creditpolicyshouldbeaccommodativeespeciallyformanufacturing,service,SMEsandLGFVs.Thecentralbankmayfurtherloosencreditsupplyforpropertysector.Fiscalpolicyshouldbemoreproactivewithamildincreaseofbroaddeficit.Chinamayextenditstaxcutfornewenergyvehicleconsumptionandequipmentcapex,andstrengthenfiscalsupporttonewlystrategicindustries.Last,newcabinetleaderswilladoptapro-businessstance.Theymaylaunchsomereformandopeningpoliciestoboosttheconfidenceinfinancialmarketandbusinesscommunity. Chinamayseeagradualresumptionwithamildreflationafterthereopeningofitseconomy.Afterthereopening,demandformedicine,treatment&healthcaremayincreaseastheCovidvirusinfectsmanypeople.Meanwhile,demandintransportationservice,catering,hotel,tourism&recreationalservicemayreboundrapidly.Theresumptionofcapex,durableconsumptionandhousingmarketmaybegradualasittakessometimeforemployment,incomeandconfidencetorecover.China’sserviceinflationmaymildlyriseinthereopeningprocessasdemandresumesfasterthansupplyinsomeservicesectors.However,thereflationriskshouldbelowastheresumptionofdomesticcapex&consumptionshouldbeslow,andoverseasrecessionwillcausedisinflationpressureincommodities.ThemassivevirusinfectionshouldhavelimitedimpactonChina’slaborparticipationasthevirusbecomesveryweakandtheunemploymentpressureishighinthecountry.WeexpectChina’sCPIgrowthtomildlyrisefrom2%in2022to2.3%in2023. PLEASEREADTHEANALYSTCERTIFICATIONANDIMPORTANTDISCLOSURESONLASTPAGE Figure1:NewOrd