Don’t Extrapolate Slow Chinese Q4 Economic Growth

Stocks’ choppy January continued Tuesday, with several indexes globally in the red.^[i] The potential for a US interest rate hike once again got most of the blame from financial commentators we follow, but headlines also dwelled on another bit of news: Chinese gross domestic product’s sharp Q4 slowdown. (Gross domestic product, or GDP, is a government-produced measure of economic output.) Though 4.0% year-over-year growth modestly beat expectations, it was the weakest expansion since lockdowns induced an economic contraction in early 2020, and many commentators we follow warn new regional lockdowns could cause further damage from here.^[ii] That is possible, and it won’t shock us if weak Chinese data weigh on sentiment for a while, contributing to the grinding returns we think are likely in the first half (or so) of this year. Yet we also think China is likelier than not to continue contributing to global growth, eventually rendering fears false.

Under the hood, economic trends remained largely unchanged from prior quarters. Exports and manufacturing continued driving growth, with the former up a whopping 20.9% y/y in December.^[iii] But personal consumption remained lacklustre, with retail sales crawling just 1.7% y/y higher in December and property investment contracting for the first time since early 2020’s lockdowns.^[iv] In our view, it is important to consider that this weakness appears largely self-inflicted, stemming from the government’s zero-tolerance COVID approach and efforts to reduce leverage in the property sector. This is key because, new lockdowns aside, we see some evidence of these policies softening at the margins. The government is already reportedly going easier on less-distressed property developers, and monetary policy officials cut interest rates on Monday, which we think is likely to help cushion them further.

Lockdowns and the zero-COVID policies are wild cards, especially with the Beijing Olympics looming. However, political considerations suggest to us that a hardline policy stance is unlikely to last indefinitely. Based on all of the political reporting we have monitored, President Xi Jinping still appears to be intent on securing an unprecedented third term at this autumn’s National Party Congress. According to our analysis, this makes ensuring social stability paramount, so ensuring economic stability seems vital to us. If policies impact growth materially from here, we think officials will likely do whatever they can within reason to shift course and stoke the economy.

March’s annual parliamentary session will probably be instructive in this regard, as this is usually when the government releases its full-year GDP growth target. In our experience, this is generally less of a target than a floor—the minimum growth rate officials will accept. Historically, officials have used fiscal and monetary stimulus as needed to ensure they reach that goal, particularly in years with major political events like this one. Whether they do so now likely defies prediction, as we think government decisions are impossible to assign probabilities to—especially in one-party nations with command economies. But we think the history is probably a useful guide, and securing a third term likely gets easier if Xi can portray himself as the man who rode to the rescue for ordinary people.

Again, this doesn’t automatically preclude more weak data in the near term, especially with COVID in its winter season. Based on our observations of the marketplace and understanding of how headlines affect investor sentiment, slowing Chinese growth often seems to touch investors’ nerves, so we encourage readers to prepare now for China-hard-landing fears to run hot. Commentators’ warnings of trouble may even look right for a spell. But as the year wears on, the weather warms and growth likely stabilises, we see a high probability of falling uncertainty—adding to the late-year tailwinds we think are likely to materialise in the back-end-loaded year we think global stocks are likely to experience.