The shock of lifting COVID restrictions will be counteracted

CHINA - Report 30 Dec 2022 by FAN Gang and Chunyang Wang

In early December, China abandoned the zero-COVID policy restrictions it had maintained for nearly three years. This move was followed by a rapid increase in the number of infections all over the country. There are still challenges ahead, but we believe the economy should return to normal growth after the initial shock has passed.

Industrial output grew 2.2% y/y in November, down 2.8 pps from October. This lowered industrial output growth in January-November to 3.8% y/y, down 0.2 pps from January-October. Investment rose 5.3% y/y in January-November, down 0.5 pps from January-October, driven mainly by infrastructure investment.

The overall PMI production index, manufacturing PMI and non-manufacturing business indexes were 47.1%, 48% and 46.7% in November, down 1.9, 1.2, and 2 ppts from October, showing that the economy is generally weakening.

Retail sales of social consumption goods fell -5.9% y/y in November, down 5.4 pps from October, leading the January-November growth rate to fall -0.1% y/y, and to fall 0.7 pps from January-October. Exports slowed significantly. In November, exports rose 0.9% y/y, down 6.1 pps from October.

Deflation risk is emerging, leaving room for future monetary expansion. PPI fell -1.3% y/y, the same as in October. CPI rose 1.6% y/y, down 0.5 pps from October. Monetary policy is stable. M2 rose 12.4% y/y, up 0.6 pps from October. M1 increased 4.6% y/y, down 1.2 pps from November.

The China Central Economic Work Conference (CEWC) concluded on December 16th, with a policy package that stressed boosting confidence and enlarging domestic consumption; proactive monetary and fiscal policy will be used. Although the lifting of the zero-COVID policy will have a medium and long-term positive impact by reintegrating China into the world economy, the immediate impact might be ambiguous, even negative. With the fast spread of COVID making millions of people sick daily, people are afraid of multiple infections, a situation still hurting consumption. The central government meeting will provide stabilization for this COVID policy change shock, given the government's preparations for fiscal and monetary expansion.

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