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China: There Is Life After Zero-Covid

If the challenges remain numerous, China will leave the zero-covid policy in 2023 and keep many assets for the future.

By EC Invest

In China, the sudden abandonment of the zero-covid policy did not translate into the explosion of growth that the world expected. As a result, investors remain cautious about the country, and they are not the only ones: the Beijing government has set a growth target of 5% for 2023, the lowest level in decades. Nevertheless, China still has significant assets in our eyes.

A prudent but realistic goal

If the Beijing authorities have opted for a relatively modest growth target of around 5%, they want to take advantage of it again. In 2022, growth barely exceeded 3%, while the target was 5.5%. Missing a year of growth is another year, especially when justified by the pandemic. Ignoring it for two years would be seen in China as a sign of poor economic management.

Beijing prefers not to take risks, opting for a relatively modest but realistic objective. As a result, while the post-pandemic start-up will take place, the challenges facing the Chinese economy in 2023 will likely be numerous, both in the domestic market and investment and foreign trade.

Internal market: The return to old recipes

The restart of the Chinese domestic market was never as strong as the one we experienced in the West following the end of the restrictions. However, contrary to what happened in our country, the Chinese state spent less than hundreds of billions to help households and businesses.

As elsewhere, the household savings rate rose sharply in China in 2022. But the absence of aid has meant to the households that, in case of problem, there will be no benevolent hand of the State and that everyone must be able to arise to his needs. Therefore, they will be more reluctant to part with their savings than Westerners. And as a result, their demand is experiencing a different surge. China will therefore have to rely on other assets to rebound.

The first good news is that the disaster that some predicted when the Covid-zero policy was suddenly abandoned, with millions of deaths at stake, did not happen. As is often the case, China needs to be more transparent in this area, but it is clear that activity is picking up after the brutal end of 2022. The PMI indices are at levels that have yet to reach since 2012.

The end of restrictions and the normalisation of the labour market have much to do with it. But so has the return to good old recipes. In 2021, China established rules that severely restricted access to credit for highly indebted real estate developers. The decision aimed to reduce the risks to the Chinese financial system and improve its soundness. But Beijing faced a desperate housing market, which weighed on household confidence, spending, and construction activity, one of the engines of the Chinese economy. So to revive it, Beijing has revived credit. Up 17% in January compared to January 2022, it allows promoters to resume their projects and households to invest.

Now stabilised at the national level, residential real estate prices are rising again in some major cities. The construction sector’s MIP exceeds 60 points, a sign of a clear rebound in activity. Still, meagre inflation (1% in February) indicates that private demand is still far from its pre-pandemic level. But she’s clearly on the right track.

Exports and investment: an entirely different challenge


Exports (+7%) and investment (+5.1%) remained China’s two main engines in 2022. But here, too, challenges arise.

First of all, the American economy and, more importantly, the European economy will have a challenging 2023 year in which they will have difficulty remaining afloat and avoiding recession. Their demand will therefore be weak, which will undoubtedly weigh on Chinese foreign trade and growth broadly.

Then there is an investment that is less promising than in the past, as a result of the willingness of Western companies to shorten their production and supply chains and to show their credentials in terms of ESG criteria.

Finally, it is difficult to ignore the severe deterioration of relations between China and the United States, which is determined to prevent China from becoming a threat to its global hegemony before it is too late. Pushed by the United States, restrictions on Chinese products and technology transfers in the country followed one another. This could have an impact on both investment and exports. This is all the more the case because, in specific fields such as communications or new technologies, the presence of companies from the Middle Kingdom on Western markets disturbs them.

The investment will, therefore, increasingly be made through the Chinese champions, whom Beijing asks to advance new technologies in key sectors, such as energy transition, semiconductors, artificial intelligence and technology at large.

Fiscal, fiscal or monetary policy, the Beijing authorities have important levers to achieve their goals and relaunch their internal market. On the other hand, they can’t do much about decisions made in Washington and elsewhere in the west. A more isolated China in the Western world will find it more challenging to return to and stabilise at high levels of growth.

Faced with the challenges we are discussing, we wonder if China will be able to do much better than the 5.0% growth forecast by the authorities for 2023. It is also likely that an economy of this size will never return to the double-digit growth levels that characterised it a few years ago. But unlike Europe, which is sacrificing its competitive advantages one after the other, China has a long-term vision and retains control over a range of products and technologies that will be essential in the future, particularly in technology and energy transition.

China is expected to be the main driver of the global economy in 2023. But it also has the necessary assets to succeed well beyond. So although Chinese equities have taken some 27% since November 1, they remain attractive to us and continue to integrate our portfolios as a diversification.

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