What’s ahead for China?

Everything hinges on a successful COVID reopening, says our chief China economist.

2023 Year Ahead Outlook

Helen Qiao, Chief Greater China Economist and Head of Asia Economics Research

December 22, 2022

Key takeaways

  • Though many risks remain, China’s reopening could lead to a strong economic rebound by the third quarter of 2023.
  • The property market, battered since 2021, may have turned the corner as tight policy has eased.
  • With pent-up demand and elevated savings, consumers will lead the recovery.

The pandemic took center stage in China in 2022, as the world’s second-largest economy struggled with COVID outbreaks and the economic fallout of widespread lockdowns. With restrictions lifted as of early December, China’s growth in 2023 will depend in large part on how the reopening progresses throughout the year, says Helen Qiao, Chief Greater China Economist and Head of Asia Economics Research for BofA Global Research.


Here, Qiao discusses what’s ahead for China’s reopening, its struggling property market, consumer demand and how China can overcome its challenges in the year ahead.


This interview took place on:  November 30, 2022 (updated December 8, 2022)


Generally, what is your economic outlook for China in 2023, and why are you expecting above-consensus growth?


We’re forecasting 5.5% GDP growth for 2023, which is well above the consensus of 4.9%. One reason is that China’s sluggish pace of about 3% for 2022 creates a low hurdle for greater growth next year. A consumption-led recovery could actually be quite significant, as economic activities resume and more people leave their homes and travel to see their loved ones. There are bound to be challenges, but we expect substantial growth to resume by late in the second quarter, with the strongest rebound starting in the third.


China’s COVID-zero policies and restrictions captured global attention in 2022. How have they affected China’s economy and what is the likely path of reopening in 2023?


Those policies took an economic toll, for sure. COVID restrictions were especially confusing for small and medium-size companies, which had to pay rent and labor costs even when they couldn’t stay open. Job opportunities and incomes were deeply impacted, and service industries struggled at a time when people couldn’t dine out, travel or even go to the gym. Other countries experienced similar setbacks as COVID swept through earlier, and in 2022 the greatest impact was in China.


Now that reopening is underway, we expect to see economic recovery and growth gain momentum. Still, the way forward in China is probably going to be bumpy, with two steps forward and one step back, especially at the beginning. A negative shock to the economy could arise from fear of infections and from labor shortages as people are infected, rather than from lockdowns.


Chinese consumers are waiting for the time when their spending power can finally be unleashed.”

How will changing U.S.-China relations impact China’s growth in 2023?


This dynamic clearly presents risks to our growth forecast based on numerous concerns, from tariffs to geopolitics and Taiwan. There are still a lot of questions and problems in the U.S.-China relationship. But the leaders’ ability to meet face-to-face rather than remotely—as at the G20 summit in Bali in November 2022—opens the way for better communication. This is very important for solving future problems.


What role will the savings levels and consumption by domestic consumers play in China’s recovery?


Chinese consumers are waiting for the time when their spending power can finally be unleashed. Mobility and consumption will likely remain weak in the near term and improve by the third quarter, when the reopening is more fully complete and consumer confidence has recovered. Their spending power comes not from government subsidies but from high levels of savings they accumulated during the lockdowns. In 2022, domestic household deposits increased by about 5 trillion renminbi, compared with about 2 trillion during a more normal year. We think at least half of that increase will go toward relieving pent-up demand, which should support a consumer-driven recovery.

What’s behind the property market turmoil in China, and what impact could this have on China’s economy in 2023?


The downturn started in 2021, when policymakers concerned about ever-rising property prices significantly tightened funding policies. This created a crippling liquidity crunch for private developers, many of whom were highly leveraged. Buyers lost confidence in developers, leading to a drop in sales and construction. All of this in turn affected sales of construction materials such as steel and glass, electronic appliances and other goods and services. Property, which had long been a major contributor to China’s economy, became a drag on growth in 2022.


Though the turmoil continues, the silver lining is that regulators have reached a turning point and are stepping up efforts to support financing for private developers. We think that the overtightening that led to the property crisis has already been eased, with central and local governments trying to reestablish buyer confidence and support developers. The property market may not return to growth in 2023, but these developments suggest it will no longer be a major drag on the economy.


What opportunities or risks will you be watching that could potentially lead to greater- or less-than-expected economic growth?


If the reopening is especially fast and efficient, growth could exceed our expectations. But if it’s a slow, mismanaged process, we could see more pain down the road. Another key question is external demand for Chinese products. We are currently pricing in recessions for the United States, the U.K. and the Euro area in the first quarter of 2023. If those are more intense than expected, that could create downside risk for China. Of course, U.S.-China relations is another area we’re watching very closely, since they could tilt either way. For now, at least, there is an even balance of risks and opportunities on both sides of our forecast.