Transcript
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Speaker: Welcome to another edition of Under the Banyan Tree, where we put Asian markets and economics in context.
Speaker: My name is Fred Newman.
Speaker: I'm the chief Asia economist in Hong Kong, and my co-host, Harold van der Linde, is still away on a very well-deserved break.
Speaker: But I'm joined today by our chief China economist, Jing Liu, where the Party Congress, having wrapped up, attention now shifts to the longer-term outlook for the Chinese economy.
Speaker: It's been a challenging year to say the least.
Speaker: We had very volatile markets, the property market is still struggling and of course we've also had virus control measures that kind of weighed on domestic demand as well as transport and logistics.
Speaker: GDP has beaten expectations but is that enough to lift the mood for consumers and investors?
Speaker: Let's kick off the conversation right here on The Banyan Tree.
Speaker: Let's start with a recap of China's latest economic growth report.
Speaker: Third quarter GDP showed a rise of about 3.9% year on year.
Speaker: That's actually better than many were expecting.
Speaker: It's also up from the second quarter when the economy barely rose.
Speaker: On the positive side, industrial production grew at the fastest pace since February.
Speaker: Manufacturing production was also up significantly, particularly in the tech sector.
Speaker: At the same time, property investment is still seeing double-digit contraction and retail sales growth was down across several major cities in mainland China.
Speaker: So, Jing, the Party Congress just concluded.
Speaker: There was lots of commentary around this.
Speaker: But now turning forward, looking into going into 2023, what are you watching?
Speaker: What determines really the growth outlook as we head into next year?
Speaker: Right.
Speaker: So actually for the party congress, it's important to note this is a political event where the most important task is for the leadership reshuffle together with amendment to CPC's constitution.
Speaker: So in that regard, whenever it mentions economic policy, it is only at the high level.
Speaker: So what I am watching for
Speaker: a couple of important events down the line.
Speaker: The first one we can expect would be the Central Economic Working Conference, usually taking place around early to mid-December.
Speaker: And that would be the time where, you know, the officials sit down and conclude what they have been doing
Speaker: this year and what they need to do for the next year.
Speaker: Given that this year, most likely China will miss its growth target for the first time in history, I think next year's focus would be how to generate the solid economic recovery.
Speaker: And other than that, we also have a national financial work conference.
Speaker: And of course, next March, we're going to have the National People's Congress, where we would see the government officials will be appointed, including China's central bank PBOC governor.
Speaker: By then, we will have more clarity about economic and financial policies going forward.
Speaker: So, these key economic policy decisions are yet to be made.
Speaker: So, over the coming months, we're watching some of these conferences and committee meetings that you mentioned very closely for policy content.
Speaker: But we have a forecast of 5.2% GDP growth for 2023.
Speaker: How realistic is that at this point?
Speaker: Well, we think it's very achievable for the following reason.
Speaker: First of all, I just mentioned this would be the first year in history China will meet its growth target, most likely.
Speaker: So that means next year, growth recovery will be the primary task.
Speaker: In that regard, there will be more economic growth.
Speaker: And also this year, we are likely only to see 3.5% of growth.
Speaker: So the base effect is playing in favor of stronger growth next year.
Speaker: And last but not the least, we also expect the policy implementation to improve substantially.
Speaker: Because usually in China, after the political reshuffle, the newly appointed officials settle in their post, they would have the incentive to deliver.
Speaker: So going into next year, the economic backdrop will likely become more challenging.
Speaker: How big a drag will exports be for China's economic growth in 2023?
Speaker: For the export, actually starting last year, we expected export to soften.
Speaker: Back then, the theory was as the world normalizes from the pandemic, consumption will rotate from goods to services.
Speaker: Now, ending to that kind of pressure,
Speaker: would be the global recessionary risk on the rise.
Speaker: But I think, you know, for China's case, in terms of the total contribution to the GDP, export is no longer the big part.
Speaker: So even a downturn in exports then shaves off just a little bit off of China's GDP growth.
Speaker: I think we had estimates around 0.2 percentage points off of headline growth.
Speaker: So not helpful, but also not a big, big drag for the economy.
Speaker: More important, of course, is what happens domestically.
Speaker: What is a baseline sort of scenario for the housing market, the key, key growth driver for the China's economy really over decades?
Speaker: For the short term, I think the government still have some policy room to ease.
Speaker: For example, this time around, we have seen the government cut the mortgage rate for about 140 basis points.
Speaker: Last time, when we see the housing market downturn back in 2015 to 2016, total mortgage rate cut amounted to 250 basis points.
Speaker: So there's more that the government could do.
Speaker: And on top of that, we also see recently the policy banks and commercial banks are tapped on the shoulder trying to extend more loans to support the property sector.
Speaker: We think that will continue to play.
Speaker: And in the short run going into next year, probably the housing market will be less of a drag to the economic growth.
Speaker: And in the longer term,
Speaker: We think China is trying to engineer the structural transition where the housing market will not be the key growth driver.
Speaker: Okay, time for a quick break, but stay with us.
Speaker: In part two, we'll discuss with Jing some of the impact that the virus control measures have on economic growth.
Speaker: Welcome back, Jing.
Speaker: We talked about the property sector, but of course, another big drag on the economy, certainly this year, were these relatively stringent virus control measures that were applied in mainland China.
Speaker: For 5.2% growth next year, what is your assumption around some of these measures?
Speaker: Well, good question.
Speaker: We actually continue to see the gradual relaxation of the containment measures.
Speaker: So if you recall, early on, China had even more stringent containment measures, such as inbound travelers are subject to up to three weeks of quarantine.
Speaker: Now that has been shortened to up to 10 days, and that could continue to evolve.
Speaker: At the same time, I think it's important to look at the efforts Chinese government have been making on both developing new vaccines and also trying to push for higher vaccination rates.
Speaker: In early October, vaccination coverage for elderly above 60
Speaker: already exceed 86% for two shots and for three shots already cover two thirds of the elderly.
Speaker: So that's a gradual but continuous progress.
Speaker: And also I think, you know, you might have noticed some recent changes earlier
Speaker: For example, a lot of Chinese airlines announced they're going to add more international flights.
Speaker: So this kind of small adjustment will keep on happening and we will see the gradual relaxation playing out in 2023.
Speaker: So that means a gradual relaxation could obviously unleash quite a bit of pent up spending demand coming through on the consumer side.
Speaker: So the services sector should probably benefit as well.
Speaker: And so that...
Speaker: presumably like in other economies, should be quite a potent impulse to economic growth over the coming year.
Speaker: But then that's maybe not enough.
Speaker: At some point, we also need potentially policy measures to help spur growth along.
Speaker: Is there enough policy space in China to deliver more easing over the coming few months?
Speaker: Definitely.
Speaker: We see that Chinese government have policy rooms both on monetary policy perspective and also fiscal policy side.
Speaker: For the monetary policy, if you look at the inflationary pressure in China, it's very different from the Western countries.
Speaker: In particular, the recent print September core inflation, China only had
Speaker: 0.6% year on year.
Speaker: That's even lower than Japan's core inflation, which means from the central bank PBOC's perspective, it has a relatively easier task maybe than some of the peers in the sense that it needs to roll out accommodative policies, but at the same time, it's not constrained.
Speaker: by the inflationary pressure.
Speaker: So we think PBOC might continue to inject liquidity through the so-called structural monetary policies, including relending, rediscounting schemes they have created over the past year or so.
Speaker: At the same time, they could further cut the RRR rates in order to support the liquidity in the economy.
Speaker: From fiscal perspective, we think next year, the government is likely to push for the all-out infrastructure investment.
Speaker: So far, we have seen the infrastructure investment holding up very well, growing by double digit.
Speaker: And next year, the central government could do more, such as engaging the policy banks, et cetera, to provide support for further infrastructure projects.
Speaker: Thanks, Jing.
Speaker: So, by and large, it seems that some of the key economic decisions on economic policy affecting growth next year are yet to come because we have key policy decisions being rolled out, possibly year-end and then by March in the National People's Congress.
Speaker: But you also paint generally, I think, a picture of potentially a fairly decent cyclical rebound in the Chinese economy going into next year.
Speaker: partly aided by stabilization measures and partly aided by the fact that we already had weak growth in China this year.
Speaker: And so the base effect of pent-up spending returning should actually lift growth north of 5%.
Speaker: And that's, I think, currently a fairly encouraging take on the Chinese economy.
Speaker: That's all we got time for today's show.
Speaker: Thank you, Jing, for joining us here under the banyan tree.
Speaker: Remember, you can find all of our regular HSBC Global Research podcast on the HSBC Global Viewpoint platforms on Apple, Spotify, and LinkedIn.
Speaker: I'll be hitting the road again soon, but my regular co-host, Harold van der Linde, will be back in the hot seat next week.
Speaker: Take care, and thanks again for listening.
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Speaker: We hope you enjoyed the discussion.
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