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China reassures Davos that growth will return, Covid has peaked

China reassures Davos that growth will return, Covid has peaked
Liu He, China's vice premier, on the opening day of the World Economic Forum in Davos, Switzerland, on 17 January 2023.

China’s top economic official told an audience of international billionaires and bankers that his country’s economy will likely rebound to its pre-pandemic growth trend this year after coronavirus infections passed their peak.

Vice Premier Liu He addressed the World Economic Forum’s annual meeting in Davos, Switzerland, just hours after Beijing released better-than-expected economic data for the fourth quarter, fueling hopes of a more rapid recovery in 2023. 

With Chinese gross domestic product expanding just 3% for the whole of last year, Liu expressed confidence of a return to the rates of close to 6% witnessed prior to the Covid-19 shock.

“We are confident China’s growth will most likely return to its normal trend,” Liu said, adding that life in China had been “restored to normal” following the lifting of pandemic restrictions. Beijing’s focus this year will be on boosting domestic demand, which will lead to a notable increase in imports, Liu said.

Addressing the wave of Covid infections which has strained hospitals in China, Liu said that the peak of infections had passed and consumption-related industries have returned to normal. 

China’s decision to stop widespread testing and tracking of the virus makes it difficult to know if the outbreak has peaked nationally. Several officials have declared that the peak is past in some parts of the country, just six weeks after China abandoned all of its Covid curbs. 

The imminent Lunar New Year holiday, when millions of workers travel from urban cities to their hometowns, means that any part of China that’s managed to evade the virus thus far will likely be facing outbreaks in the days to come. Death rates also tend to lag infections by several weeks, meaning the worst may be yet to come for some of the most vulnerable segments of the population.

Liu, a close confidante of China’s President Xi Jinping, sought to allay international concern that Beijing is turning away from globalisation to focus on self-sufficiency. 

“China’s national reality dictates that opening up to the world is a must, not an expediency,” Liu said. “We must open up wider and make it work better. We oppose unilateralism and protectionism,” he said, adding that opening up “is a key driver of economic progress.”

Liu also tried to address concerns that Beijing is clamping down on private businesses. He said a return to a planned economy was impossible, while a government drive for “common prosperity” does not mean enforcing strict equality, and requires entrepreneurial effort.

On China’s real estate sector, which has been undergoing a deep slump for more than a year after Beijing restricted financing for the sector, Liu said that the real estate was a “pillar” of the economy and that recent measures to provide financing to property developers have led to “noticeable improvement” in supply and demand for houses.

Goldman Sachs economists said Liu’s comments about the property market suggests there could be more support for the industry in the works.

“More demand easing measures could be announced and large developers’ funding conditions might improve further on the back of policy support,” the economists including Maggie Wei wrote in a Tuesday note. Liu’s remarks “should help further restore confidence of investors”, they said. 

The speech came on the day China announced its population shrunk by almost 1 million in 2022, the first decline since the 1960s. That means China will need to rely more on productivity to drive growth going forward.

“We expect economic reopening post-Covid and stabilization of property to drive China’s GDP growth to about 5% in 2023, a recovery from 2022,” said Wang Tao, chief China economist at UBS AG. “This is in line with Vice Premier Liu’s prediction of growth returning to normal trend.”

Liu is best known outside China for his role as China’s top negotiator in trade talks with the US under the Trump administration. Within China, he has been an advocate for slowing the growth of debt in the economy, increasing the role of markets in allocating resources, and reducing excess capacity in sectors like steel and cement.

In his speech, Liu said China is in the process of transitioning to a more consumption-driven growth model. He added that China’s aim to achieve carbon neutrality by 2060 will help drive economic growth, and that Beijing will focus on cutting emissions in key sectors such as steel and power generation.

Several Davos delegates pointed to a reopened China as reason to be tentatively optimistic about the global economic outlook.

“The lockdown of the last three years has created pent-up demand domestically, so I would see increased domestic consumption and of course the manufacturing sector will pick up,” said Laura Cha, chair of Hong Kong Exchanges & Clearing. “All those will be good factors for global growth.”

Citing a growth forecast of around 4.5% for China this year, Credit Suisse Group AG Chairman Axel Lehmann said “I would not personally be surprised when that would be topped.” DP World chairman and CEO Sultan Ahmed Bin Sulayem told Bloomberg Television that China’s emergence from Covid Zero will be a key factor in boosting international trade, although he said the impact wouldn’t be immediate.

Liu, who is set to meet US Treasury Secretary Janet Yellen in Switzerland this week, made a veiled criticism of interest-rate hikes to tame inflation in developed countries. 

He said that in some cases such policies could lead to recession, and that more attention should be given to their spillover effects on developing countries. Liu said that China is “ready to work with all parties to find solutions to the debt issues of some developing countries”.

Liu, China’s top economic official since 2012, has reached the conventional retirement age for senior Chinese politicians and is in the process of being replaced by another Xi confidante, He Lifeng. Liu stepped down from the ruling Communist Party’s top Politburo in October, while He was elevated into that group. He is expected to replace Liu as vice-premier responsible for China’s economy at a government meeting which normally occurs in March.

“A strong message from Mr Liu’s speech is that China will stick to what has worked well for China in the past few decades and take a pro-growth, pro-business and pro-partnership approach in a fragmented world,” said Ding Shuang, chief economist for Greater China at Standard Chartered Plc. BM/DM

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