- Macro Strategist
United States, Intermediary
Change
The views expressed are those of the author at the time of writing. Other teams may hold different views and make different investment decisions. Forward-looking statements should not be considered as guarantees or predictions of future events. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional, or accredited investors only.
This is an excerpt from our 2023 Investment Outlook, in which specialists from across our investment platform share insights on the economic and market forces that we expect to influence portfolios in the year to come. This is a chapter in the Global Economic Outlook section.
The economy: A low bar for growth
Consensus expectations for China’s economic growth have not been this pessimistic in a generation, perhaps longer. With the bar set so low, it won’t take much for the Chinese economy to deliver an upside surprise in 2023.
China has experienced a maximum stress-test. For well over a year, a triple whammy of housing-related distress, zero-COVID lockdowns, and a generalized sense of policy angst have stifled consumer and business confidence (Figure 1). Amid massive pressure on multiple fronts, nothing has gone “bang.” One can never rule out a crisis event, but I believe China’s financial system has seen the worst of the stress and passed the test. Yet many observers still have a very grim outlook for the Chinese economy. I daresay even modest improvement would feel like a rebirth of sorts.
Confidence: The missing ingredient
Market liquidity is ample and financial conditions loose, but there has not been a corresponding pickup in banking system loans. And while broader measures of credit seem to suggest that the credit impulse is inflecting, there are few signs that China’s economy is responding to present fiscal and monetary easing. My view is that this response will likely come (and with it, improving growth) when confidence recovers, which could occur in the first quarter of 2023 as policy uncertainty subsides, COVID restrictions ease, and (hopefully) stronger action is taken on real estate. The real estate sector is, in my judgment, the single biggest factor weighing on confidence — even more so than zero-COVID.
Figure 1
The real estate sector: A pivotal factor
For at least the past decade, many commentators have criticized the Chinese government’s lack of action to rein in outsized activity in its all-important real estate sector. Last year, China’s policymakers finally did something about it, leading some to wonder if they may have gone too far. Consensus is now bearish overall, split between those who believe the sector might stabilize soon and those who think otherwise. I am in the former (minority) camp.
I believe the stimuli injected so far — mortgage rates and lending, monetary policy, pledged supplementary lending (PSL), and targeted assistance to property developers — should help the real estate market and put a floor on risk. Easy financial conditions and lower interest rates are already starting to spur demand. (Indeed, mortgage rates in China are now lower than in the US.) Stabilization of the real estate sector would enable a return of confidence, paving the way for a potential economic rebound.
Inflation: Nowhere to be found
Inflation is not an issue for China today, nor do I suspect it will be for a long time to come. In fact, I think China’s inflation is sufficiently well-anchored that even if it were to rise slightly (as it might), it would still not create much of a headwind for the economy.
Chinese core inflation is below 1% as of this writing, while the country’s low level of domestic demand and an absence of direct income support to consumers have kept the commodity price surge from impacting headline inflation to the same degree as in developed nations. Mild inflationary pressures should allow both fiscal and monetary policy easing to continue through much of 2023. Moreover, one silver lining of zero-COVID has been to suppress demand more than enough to prevent a widespread inflation problem from emerging.
Zero-COVID: On borrowed time
The zero-COVID policy was extremely effective at minimizing infections and case counts, while maximizing China’s economic activity until the Omicron variant appeared. Since then, however, maintaining the policy has come at a heavy cost for the economy. In light of this major trade-off, the government will likely discontinue zero-COVID and choose to let China “live with” the virus beginning at some point in 2023. I believe it has become clear to Chinese leadership that adhering to its current policy stance is incompatible with its economic and social objectives.
Latest update: Over the past month, China’s pandemic containment measures — lockdowns, isolation, contact tracing — became overwhelmed by a large number of infections. This forced the government toward a policy shift, easing COVID restrictions nationwide even as case counts rose and accelerating vaccination rates for vulnerable individuals. As a result, I expect China to reach a state of “hybrid immunity” that should enable a full reopening in 2023. Between now and then, there may be many more infections as the virus spreads further, which could restrain mobility and economic activity. But markets, recognizing that China’s path to reopening is critical for the global economy, are already looking toward the eventual “renormalization.”
Expert
READ NEXT
Article 1 from Investment Strategy Outlook
Related Insights
Showing
of
Insights Posts
Monthly Asset Allocation Outlook
Wondering how to reposition your portfolio amid election-related uncertainty? Explore the latest monthly snapshot of our Multi-Asset Team’s asset class views.
5
min
Article
2025-11-30
Time to capitalise on the evolving role of bonds?
We outline why we think the new economic era is elevating the role of bonds as a source of attractive and stable income, downside protection and portfolio diversification.
2
min
Article
2025-09-30
No bulls in the China shop?
John Mullins, Irmak Surenkok and Steven Ye assess the investment debate surrounding China's prolonged underperformance and outline three investment ideas for active investors to consider.
Article
2025-03-31
Bizarro World: Could 2024 be the opposite of 2023?
Fixed Income Portfolio Manager Brij Khurana details the dynamics that may upend investor expectations of a repeat of 2023 this year.
Quick Take
2025-01-17
Will a “Goldilocks” economy be just right for equity markets?
We provide an outlook on the ongoing shift to new investment regime, and the market segments that we expect will most heavily influence global equity performance in the coming year.
Article
2024-12-31
Full speed ahead: China’s race to implement AI
Our experts examine market implications of China's AI expedition.
Quick Take
2024-11-30
Beyond China: what does the rest of the EM equity world have to offer?
For investors contemplating a separate allocation to EM ex-China equities, members of our iStrat Team share their research on the composition of the opportunity set, the growing divergence in the behavior of EM ex-China equities and Chinese equities, and the long-term market outlook.
Article
2025-11-30
How geopolitics and the energy transition may reshape global trade
We explore the potential near- and longer-term market effects of deteriorating US/China relations, coupled with the shift toward a low-carbon economy.
Article
2024-11-30
Look below the surface: A contrarian view on China equities
Equity expert, Ben Chen, dives into China's murky investment landscape.
Quick Take
2024-05-31
China fixed income: Dislocations create opportunities in this large and diverse market
Hear from our experts as they uncover new fixed income opportunities in China.
Article
2024-11-30
URL References
Related Insights
China’s growing self-reliance could bolster its equity market
Our expert, Philip Brooks, finds reasons for optimism in China's equity market.
By
Philip Brooks, CFA