China’s growth rebound and the future of its zero-covid policy

After a mere 0.4% in Q2, Chinese GDP expanded by 3.9% from one year ago in Q3, beating expectations. The rebound in industrial production was one of the main drivers behind the GDP rebound, helped by monetary policy easing and fiscal support. In comparison, the improvement in household consumption was limited, likely due to the persistent covid restrictions.

Meanwhile, the Chinese property sector is showing limited signs of improvement. Housing sales in September contracted less than in the previous month, but most developers remain stressed. Housing prices continued to decline last month, although only moderately. We do not expect a general collapse in housing prices in China as there is no sign of a demand-driven bubble at the national level.

Overall, the latest data releases out of China paint a mixed picture of the economy, with the industrial sector improving much faster than household consumption due to the uneven impact of the on-going covid restrictions. This means we are seeing a ‘two-tier’ recovery.

Previously, we had been flagging potential downside risk to our GDP growth forecast of 3.2% for the Chinese economy in 2022, mostly due to the uncertainties related to covid restrictions. However, given the positive surprise in Q3 GDP, we have decided to keep our current forecast unchanged for the time being.

There are no clear signs that the authorities’ zero-covid policy will change meaningfully in the near term. In our view, we will need to see a pick-up in vaccination momentum, a strengthening of China’s health system and a change in the official narrative about the pandemic before covid controls can be gradually phased out.

Progress on each of the three points will require time. Thus, we are not expecting any imminent change in the authorities’ zero covid policy. The next major focus of attention will be the National People’s Congress (NPC) in March 2023, when the reshuffle of the communist party leadership will be fully completed. We think the zero covid policy could be gradually phased out after the NPC meetings. In the meantime, the economy’s two-tier recovery could continue.