In recent months, the ongoing "exit wave" on the back of China's faster-than-expected reopening has taken a heavy toll on economic activity due to surging infections, a temporary labor shortage, and supply chain disruptions. Despite the continued weakness, and to everyone's surprise, China's economic activity broadly beat low market expectations.
And even though this strong growth came mainly from food, economists think the message is clear as a bell, and China’s economy has likely already passed a turning point in Q4 and will strengthen from Q1 onwards. On the other hand, investors view the beat as dashing hopes of PBoC rate cuts that would significantly enhance the growth outlook. Hence the all-things-China rally is losing a bit of steam.
The China reopening is especially important. On the back of the latest GDP print, I expect upside estimates to H1 GDP growth, with the peak in nationwide COVID cases likely behind us and high-frequency indicators of economic activity such as subway usage and domestic passenger flights picking up.
Expansionary property market policies and a return to consumption will be the engines of growth this year; crucially, the accumulation of household savings is massive and has risen fast over the past three years. Ultimately when Chinese consumers start spending, it will be a material boost to global growth, commodities, and Chinese stocks. It will also mark another positive development for the European growth outlook.