The key to China’s recovery

Greater China’s reopening has fueled market expectations of a surge in consumption and investment that could lift flagging global growth. How consumer demand develops will be critical.

Speaking at the ANZ Economic Outlook Series event in Hong Kong, ANZ Greater China Chief Economist Raymond Yeung flagged a strong recovery ahead for mainland China’s economy. He expects growth to expand to 5.4 per cent, adding $US214 billion to global GDP in 2023.

While the rebound has started modestly - spending over Lunar New Year was weaker than previous years and mainland tourism slower to return - it is likely to pick up over the next several months thanks in part to fresh government stimulus.

“If China’s government has the determination to boost the economy… then I believe a lot more stimulus will be coming,” Yeung said.

China lifted strict COVID-19 measures, including widespread testing and lockdowns, in late 2022. Now, the biggest task facing Chinese policymakers, Yeung said, is to encourage consumers to start spending again.

“One of the biggest challenges for the Chinese economy this year, after this reopening theme runs out, is how to boost domestic demand,” he said.

Productivity crucial

Jumpstarting domestic demand could prove tricky, however, amid elevated urban joblessness. The surveyed unemployment rate for people aged 16 to 24 reached 16.7 per cent as of December 2022, according to the National Bureau of Statistics.

As the reopening-boost subsides, China’s gross domestic product (GDP) growth is likely to slow in 2024 on the weight of structural issues such as an ageing and shrinking population, according to ANZ Chief Economist Richard Yetsenga.

“If your population is shrinking, your economy cannot grow at 5 to 7 per cent anymore,” he said. “Growth is more likely to be around 2 to 4 per cent, which is closer to the average global rate.”

Yeung said China faced diminishing drivers of growth going forward. China’s former growth engine – property – has yet to see a full recovery and, its trajectory shows some similarities to Japan’s ‘lost decade’ of the 1990s.

Boosting productivity is the lever China needs to focus on to avoid the onset of its own lost decade, Yeung said.

“China is deleveraging the economy with very few drivers to accumulate capital anymore because of the slowdown in exports,” he said. “The only growth driver China can push for is technology.”

Despite potential downside risks from structural issues, Yeung believes China is on track for its goal of doubling GDP by 2035 and becoming a high-income nation by 2050.

Put to rest

China’s ongoing recovery should also put to rest fears of a global recession, according to Yetsenga. With China making up about 20 per cent of global GDP, the prospect of a global recession is becoming less likely as the country opens, he said.

The US economy has also proved to be more resilient than expected in absorbing the series of rate hikes over the past year, Yetsenga said. Unlike the global financial crisis, the current US economic cycle is witnessing its least credit-intensive upswing in 40 years, reducing the risk of a hard landing.

“The good news, in some ways, is growth has been resilient, and we expect that to continue,” Yetsenga said.

Still, ANZ’s chief economist expects inflation to linger due to persistently high consumer demand, which complicates the job of central bankers trying to balance monetary tightening and recession risks.

Expect three more rate hikes in the US, while across Asia interest rates are close to peaking - if they haven’t already, Yetsenga said.

Recovery trail

From China’s point of view, boosting consumer confidence is critical not only on the mainland but also in Hong Kong, where visitors powered retail sales prior to the pandemic.

For Agnes Chan, Senior Advisor, Chairman’s Office of EY Greater China, and member of the Chinese People’s Political Consultative Conference National Committee, the ongoing revival in sentiment is clear – particularly during the ANZ Economic Outlook Series event, held in-person for the first time in the city since 2020.

“Business confidence and general optimism [in Hong Kong] have come back,” Chan said.

Sharing her perspective on general business developments in Hong Kong and cross-border activities during the event, Chan underscored the city’s efforts towards stimulating the economy on several fronts.

“It's very important to maintain Hong Kong's IFC (international financial centre) status,” she said. “We are also doing a lot on ESG (environmental, social and governance) and on virtual assets, and Hong Kong is a world-leading green and sustainable bond market.”

However, a full recovery will require a rebound in retail sales, which is tied to confidence in the real estate sector – two key pillars of the city’s economy, Yeung said.

Complicating matters, he added, is the Hong Kong dollar’s US dollar peg, which prompts the Hong Kong Monetary Authority (HKMA) – the city’s de facto central bank – to respond correspondingly to US rate action to manage the exchange rate.

“Now we have started to invite more mainland tourists to come back to Hong Kong, which is helpful,” he said.

“Ultimately, we need to see an improvement of Hong Kong property prices. And that's not in the hands of the HKMA but in the hands of the Fed.”

While the city’s short-term outlook is dependent on the US rate cycle, over the long run, Hong Kong’s future growth lies in the greater integration of its economy with that of the mainland, Yeung said - and playing a key role in the development of the Greater Bay Area.