Don’t Extrapolate Slow Chinese Q4 GDP Growth

Stocks’ choppy January continued Tuesday, as the S&P 500 dropped -1.8%.^[i] Fed rate hike jitters once again got most of the blame, but headlines also dwelled on another bit of news: Chinese GDP’s sharp Q4 slowdown. 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 pundits 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 expect 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—a figure not inflated by lockdown base effects.^[iii] But consumption remained lackluster, 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 remember that this weakness is 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, there is some evidence of these policies softening at the margins. The government is already going easier on less-distressed property developers, and Monday’s twin interest rate cuts should help cushion them further.

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

March’s annual parliamentary session will be instructive in this regard, as this is usually when the government releases its full-year GDP growth target. 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 now defies prediction, as government decisions aren’t a market function—especially in one-party nations with command economies. But 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 preclude more weak data in the near term, especially with COVID in its winter season. Slowing Chinese growth always seems to touch investors’ nerves, too, so prepare yourself now for China-hard-landing fears to run hot. Those fears may even look right for a spell. But as the year wears on, the weather warms and growth likely stabilizes, we see a high likelihood of falling uncertainty—adding to the late-year tailwinds we think are likely to materialize in the back-end-loaded year we expect for global stocks.