China’s reopening guarantees more growth, but without return to pre-Covid level, says Credit Suisse – 02/10/2023 – Market

China’s decision to accelerate the end of its zero Covid policy shows that the focus of the country’s authorities has returned to economic growth. The resumption this year, however, will not represent a return of the main engines of the Asian economy to pre-pandemic levels.

That is the assessment of Credit Suisse’s Chief Asia Economist, David Wang. He says he does not expect a strong increase in Chinese demand for commodities due to the reopening and sees growth that is more focused on the recovery of domestic demand for services that have suffered restrictions with the pandemic.

The bank raised its projection for Chinese GDP growth this year from 4.5% to 5.1%, an acceleration from last year’s 3%, the second worst result in 50 years. Annual growth is expected to reach 6.3% in the second quarter of this year, but slow down to somewhere between 4% and 4.5% in 2024.

According to Wang, the pace and form of China’s reopening was surprising. “We predicted that at some point this year China would leave the zero-Covid policy. But this happened at least two months earlier than we had initially predicted, and the reopening was less coordinated than we anticipated”, says the economist in an interview with Folha .

He estimates that the 1st quarter of 2013 will still be affected by the increase in infections, mainly because of the Chinese New Year holiday trips. The second quarter should see a strong acceleration in growth, followed by a gradual deceleration in the next four quarters.

“We are a little cautious in relation to the magnitude of the recovery in the first quarter”, says the economist. “The virus will not behave that differently in China compared to the rest of the world, at similar stages of reopening. With Chinese New Year, the biggest migration episode in the world, there will likely be another wave.”

According to the economist, the real estate segment will no longer be an obstacle to the country’s growth. The bank projects investment growth in the sector of 3.6% this year, after a 10% drop in 2022. Even with this recovery, construction will probably not return to pre-pandemic levels.

According to Wang, the opening of China will increase domestic demand, especially for services provided to families. Real consumption growth should remain at 4%, after falling 0.2% last year. Despite the recovery, the indicator should also not return to the pre-pandemic level of more than 6%.

Weak external demand should also weigh on Chinese imports of intermediate goods and on the country’s exports.

Economists say that the Chinese recovery, while similar in magnitude, may look different to the rest of the world, with a smaller increase in demand for commodities, given the weakness of the construction sector.

Regarding food, Wang says that, to ensure that China has the food security it needs, it will be necessary to increase dependence on imports of these products, a market in which Brazil is one of the main suppliers.

“There will be some recovery in disposable income, and this will translate into a partial recovery in consumption, especially services. But consumption of services is not easily transmissible to the international sphere,” said the economist.