field hospitals, and reshaping public consensus to ease people’s since 2020, export activity has faltered lately and is expected to fears of the virus. These changes are already underway and the contract as developed economies slide into recession. In latest announcement from Beijing of 20 measures to fine-tune addition, rising geopolitical tensions between China and the US the COVID-19 strategy suggests more is to come. Phase two – notably in the area of advanced technology – could further puts the emphasis on reopening the domestic economy by impact an already soured trade relationship. The loss of this easing social and mobility restrictions, reducing mass testing, export growth contribution could add to the urgency for Beijing and abandoning the frequent use of ‘static management’. A to ease COVID-19 controls to revive domestic demand. broad liberalisation within China is assumed to be reached by the middle of next year. The final step is to open the border Better transmission improves policy efficacy with the rest of the world through successive reductions of quarantine restrictions for visitors. The multitude of economic headwinds call for continued accommodation from China’s counter-cyclical policies. It is important to reiterate our long-held view that no official Compared to this year, policy efficacy may improve in 2023 if announcement on ending the ZCP will be given until, perhaps, easing COVID-19 controls and stabilising property market can full liberalisation is achieved. But under the ZCP banner, we see help to unclog policy transmission channels. On the monetary the emphasis shifting from achieving zero infections at all costs side, the room for aggressive easing is limited by concerns to ‘dynamically adjusting’ the strategy to reprioritise economic about currency depreciation and capital outflows, while normalisation. Investors therefore need to pay more attention tightening is unlikely given the uncertain path of the economy. to what Beijing does than what it says. Incremental policy exit is possible later in the year only if economic reopening proceeds smoothly. Fiscal policy will likely There is however considerable uncertainty around this baseline stay supportive too, but Beijing may struggle to repeat some view. It is entirely possible that the fear of exposing China’s vast ad-hoc, frontloaded, stimulus implemented this year given the unvaccinated population to a virulent virus continues to hold already stretched fiscal balance sheets of local governments. Beijing back from reopening. And even if the ZCP is adjusted, With reduced potential for conventional stimulus, there are the path could be bumpier than hoped. Too slow a change will few options left to bolster growth other than freeing the do little to save the economy, while too fast an exit could lead economy from the grip of the pandemic. to surging infections and hospitalisations that overwhelm the public health system. The ensuing social backlash could set back Exhibit 12: Dissecting our growth forecast for 2023-2024 the reopening and economic recovery. We have built a cautious China - Breakdowns of growth projections forecast – including a negative quarter of growth followed by 10% 8.1% only a partial recovery – to account for potential hiccups in this 8% 5.0%4.8% 6% 3.0%3.0%1.0% 0.5% -1.0% transition, but the actual path ahead could be bumpier still. 4% 2% -1.5% 0% -2% Property and exports switch sides -4% 1.2% -6% -5.0% -0.7% -8% -10% -3.6% 3.0% Besides the pandemic, the ongoing property market turmoil -12% h D ty l ry st D ty ry l st st has also rattled the economy and financial markets. Fears of owt VI TradeFiscata eca VI a TradeFiscaecaeca contagion to the household sector and banking system – grPCO Proper Mone forCO ProperMonet for for following the mortgage boycott instance – prompted the 1D G GDP GDP GDP authorities to ease property policies. But this was barely 220 022 023 024 2 2 2 enough to slow the deterioration of conditions. The good news Source: CEIC and AXA IM Research, 16 November 2022 is that the policy wind has shifted further with Beijing now Exhibit 12 shows how our above-consensus 5% growth forecast taking more substantial steps to ease developers’ funding stress. The bad news is that there are no easy fixes to the for 2023 is derived. This is followed by a slight moderation to structural imbalances, with an overhang of housing supply in 4.8% in 2024 as the economy reverts to trend. The biggest lower-tier cities and excess leverage at many private-sector swing factor in our forecast is the ZCP, which offers a two-sided developers. After abruptly pricking the bubble, Beijing now risk. However, we consider the chances of inaction, or delayed must manage its fallout. We expect further policy support to action, from the authorities as greater than proactive action. In stabilise the market next year, helped by easing COVID-19 an adverse scenario of China continuing its current pandemic controls. But there will unlikely be a vigorous rebound of response for another year, we think the economy would suffer activities until structural challenges are tackled. from deeper economic scarring and further reduced space for counter-cyclical policy. Annual growth could fall to 3.5% or The external sector is set to become less supportive of the lower in that scenario even with the help of a low base. economy next year. After acting as a solid engine of growth 17