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China suffered one of its worst years for economic growth in decades last year, as it enforced its zero-COVID policy. Haining Zha, Portfolio Manager with TD Asset Management, says with lockdowns now in the past, China’s economy may be heading for a recovery.
Transcript
Greg Bonnell: So let’s talk about the outlook for the world’s second largest economy this year. There’s been some pretty interesting moves from China in terms of their economy. How does it play out?
Haining Zha: Things are looking good. This is probably the first time in a while that stars align no matter whether you look at COVID policy, or government policy, or regulatory policy. So they are both very supportive of the overall economy and the companies.
Greg Bonnell: What is happening in the Chinese economy, and really, China’s leadership to have sort of changed course this way? And it felt– I don’t know. You correct me, but it felt, from my point of view, a rather abrupt change in policies. Or had it been a long time coming?
Haining Zha: Right, it is. But the economic costs turned out to be too high, the zero COVID policy sustained for too long. So I think it’s about the right time. And the economy really needs a big boost. And actually, the government is probably setting their target to be above 5% growth for 2023.
Greg Bonnell: Now, let’s talk about, then if that’s the target, can they achieve it with everything they’re doing? I mean, COVID didn’t go away in the country. It was rather their approach to COVID that changed. Can they achieve that kind of growth this year?
Haining Zha: Definitely. There is a lot of potential, particularly on the consumption side. So if you look at retail sales right now, the year over year growth in December is still negative. But the trend growth is somewhere around 6%, 7%. So there is a lot of potential for consumption to recover.
And elsewhere in the investment space, in the capital formation, I think the growth there would be roughly stable. The infrastructure investment would still provide– turn out to be another growth engine. It will be a little bit weaker on the real estate side. But on the manufacturing side, driven by external demand weakening, there will be a little bit of a pressure.
And same thing on the net export. There will be a little bit of drag that is expected, driven by the weakening US and global economy.
Greg Bonnell: Now, we have been so consumed in North America, Canada, the United States, and Europe as well with inflation, soaring inflation, trying to get it under control by tightening up the cost of capital. Is it a different situation in China? Are they dealing with the same inflationary problems, or is it not really an issue for them?
Haining Zha: It’s not really an issue for them. The inflation CPI is still below 2%. And even after the reopening, although people are expecting some kind of inflation pressure, but it probably will be mainly concentrated in energy, but not the general commodity complex. The reason why, as I mentioned, in real estate sector, the real estate investment probably is still going to remain flat in 2023.
Greg Bonnell: Now, that would be domestic inflation for China. There are concerns that as China reopens the economy and its appetite grows for what, you know, we have in Canada and other nations have to sell for oil, for other commodities, that they will drive global inflation higher. Is that a risk for the global economy, that China’s appetite keeps us in an inflationary environment?
Haining Zha: Because it’s concentrated in energy product– for example, crude oil and natural gas– it’s not so much for the commodity complex as a whole, which we see in other parts of the global economy.
Greg Bonnell: Now, what are the potential risks for China? You laid out a scenario here. As they open up the economy, they eased up on the COVID restrictions, it could mean good things for their domestic economy. What could trip them up in 2023?
Haining Zha: Yeah, the biggest drag, actually, as I mentioned, is the external demand. As we know, in terms of manufacturing activity, in terms of goods consumption, things are slowing down in the US and the other developed economy. And as we know, China is a very export-oriented economy. So if that’s the case, there will be some pressure on their export business.
Greg Bonnell: Now, longer term, as we look at the strength of the Chinese economy, I mean, it is the world’s second largest economy. They don’t often see eye to eye with the world’s largest economy, the United States. What are the longer term prospects for China? What are their avenues for growth?
Haining Zha: Right, so if you break down the GDP growth, you can– so there are several components. One is the population growth. On that, actually, you see this is– 2022 is the first time that China has actually an overall total negative population growth, although that amount is really small.
The second component is the productivity growth. Productivity growth in China, I think it would be the key because a large percentage of the population, they are young, and they receive better education, and they can provide a better productivity. That’s where the hope is.
And on the capital formation side, in the past 10 years, there are a lot of investments. Nonetheless, there are some new areas– for example, in 5G, data center. They are a new type of infrastructure that China could invest more to boost the overall productivity of the economy.
Greg Bonnell: Productivity is always very important. We worry about it in this country as well, other nations. You mention the population trends in China. I’ve seen a lot of headlines about it recently, some people concerned about China’s decelerating population growth. Is it something we need to be mindful of as investors, or is China going to work through it?
Haining Zha: Right, we definitely need to be mindful, but I think the overall magnitude is not dramatic, at least for now. I think probably in the latter half of this decade, it might gradually accelerate, but it’s a very long-term thing. But the key thing is the capital– on the capital investment side and on the boosting productivity side.
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