By Sam Jochim, Economist at EFG Asset Management
China’s economy has weakened but policy easing means we expect improved conditions in 2023. Other Asian economies are well positioned to benefit from easier credit conditions.
China: missing the growth target
Expectations for Chinese GDP growth this year have been progressively revised down, especially since the summer. The depressing effect of continued problems in the housing sector – weak new construction activity and new home sales – and the impact of the zero Covid policy have been the main explanations. Looking to 2023, consensus expectations are for growth to return slightly below the government’s 5.5% target. This seems a reasonable expectation to us for three main reasons.
China: expected GDP growth in 2022 and 2023
Reasons for a rebound
First, the central bank, the People’s Bank of China (PBoC), continues to expand its balance sheet. Now, that is mainly because of the acquisition of domestic assets rather than (as was the case in the past) foreign assets (notably foreign exchange reserves). Effectively, this is
China’s version of the quantitative easing pursued by western central banks.
China: central bank balance sheet
Second, money and credit growth have remained relatively subdued as a deliberate act of policy. Concern that faster money and credit growth could stoke higher inflation is, of course, well-founded in China’s monetary history – not just the experience of the expansion after the global financial crisis but during the 1980s and 1990s.
Modest money growth recently has meant that domestic Chinese inflation has remained under control. Third, consumer price inflation was only 2.1% year-on-year in October 2022, having risen from a rate recently close to zero. In that context, inflation does not act as an obstacle to further easing.
China: money and inflation
Credit in other emerging economies
Credit growth in China since 2007 has been strong–hence the recent emphasis on restraining further growth. In other Asian economies, however, credit growth has been much more restrained. That is a key reason why we think there are relatively more interesting opportunities in those markets: credit growth can facilitate economic growth in the coming years with, hopefully, the lessons learned from China’s experience cautioning against any over-exuberant expansion.
Asian credit/GDP ratios
