Reopening of China carries risks and opportunities

China has recently reopened its doors after an unprecedented closure of its economy. Transformed by this challenging health crisis episode, the country is undergoing numerous changes, whether they are political, social, or economic. While it remains a land of opportunities for businesses, some balances seem precarious: a trade war with the United States, heightened tensions with Taiwan, a rapprochement with Russia, and complex relations with other Western powers. Is the world's second-largest economy still as indispensable for businesses as it once was?

Trade Talk invited two experts from Coface to share their opinion about the risks and opportunities for businesses in China, in light of tumultuous current events.

China’s economic situation – By Bernard Aw (Chief Economist for the Asia)

China’s economy was unable to fully recover from the shock of the pandemic as consumption was constrained by the zero-covid policy, in addition to regulatory action on sectors such as housing, technology and education. The removal of strict Covid-19 restrictions was therefore generally seen as positive for the Chinese economy. In the early months following the end of zero-covid policy, economic activity, particularly services, showed a solid rebound. In the first two months of 2023, industrial output was up 2.4% year-on-year, retail sales rose 3.5%, and fixed investment growth came in above expectations at 5.5%. The post-Covid recovery was earlier than expected.

Post-Covid recovery- By Raphaël Rousselot (Chief Underwriting Officer Asia Pacific)

In China, we can monitor business activity trends in almost real time thanks to our internal data. For instance, by tracking the frequency of requests for cover against payment default from a period to another. Our data show increasing demand for retail food and beverage on hospitality sectors. 

Obviously, the airline companies have also benefited from the end of Covid-19 restriction since the population is fully mobile. However, regarding private conceptions, concerns about unemployment or living costs may affect consumer sentiment in the near future.

China’s economic outlook – By Bernard Aw

China’s economic outlook remains challenging in the short to medium term as the country faces multiple headwinds, including weak household spending, property market decline, and constrained local governments’ finances. The central government sets a GDP growth target of “around 5%” for 2023, in which Premier Li said achieving the target “is not an easy task and requires redoubled efforts”. The ability to revitalize consumption and stabilize the housing market will be key to a robust economic rebound. We are expecting China’s economy to expand by between 4% and 5% this year.

China’s real estate market- By Bernard Aw

The November announcement of a 16-point rescue plan by the central bank and the banking and insurance regular represents the most significant change in housing policy since 2016. This announcement provides the clearest message that managing downside risk and restoring housing market stability has become a policy priority and part of an important effort to pursue economic stability. Most significantly in this plan were measures that address developers’ funding problems.

While the real estate market remains under pressure, there is some stability setting in. The Real Estate Climate Index has stopped falling. The decline in home prices has slowed in February, and other housing indicators such as real estate sales and investment also looked to have reached a bottom. A strong rebound in housing activity like what we saw in 2015 is very unlikely, especially when the structural downshift in housing demand is a key constraint.

Opportunities – By Raphaël Rousselot

Asia, the whole region, is benefiting from the return of Chinese tourists, especially Southeast Asian economies like Philippines or Thailand where tourism contributes to over 15% of GDP. 

In those countries, the rebound in tourism will have positive effects on labor markets. What will then support domestic consumption on retail sector. 

For manufacturing industries, on export economies like South Korea or Japan. This is more balanced as China recovery alone cannot compensate the current global trade environment.

Population is aging and by 2040, around 400 million or 30% of Chinese population will be 60 years or older. Meaning there will be opportunities in health sector for medical and pharmaceutical services or for medicines that are publicly insured. The ICT sector will offer business opportunities in the coming years as well. 

China government policies aim to accelerate self-sufficiency in high tech, with tax incentives on financing supports. Chinese companies are today encouraged to invest in R&D in domains like artificial intelligence or advanced chips.

Green energy is also getting strong public support from electric vehicles to renewable energy, including solar or wind. But whatever the industry is, market opportunities for foreign companies could be constrained by:

  • Sanctions from western economies and two by China regulation itself. 
  • China’s n°2 official have been quite reassuring for foreign companies. He has emphasized that China should expand market access and should facilitate trade by removing government controls. 

China’s unemployment rate- By Raphaël Rousselot

China met their labor market targets in 2022, achieving unemployment rate of 5.5%, and created 12 million urban jobs despite a challenging economic and health environment. The government continues to prioritize stabilizing employment in 2023. However, youth unemployment remains very high. Data showed a rise in youth unemployment at the start of 2023, reaching 18.1% in February. This is three times the overall urban unemployment rate of 5.6%, and notably higher than the average OECD rate of 12.8%. This year, a record 11.6m graduates are expected to join the labor force. The internet, real estate and education sectors that were traditionally known to hire fresh graduates in large numbers are under pressure after strict regulatory pressure on these industries led to layoffs and a sharp scale-back in operations. It will remain challenging for the Chinese government to create enough jobs.

The health crisis highlighted the very strong dependence of most countries on China. Now there is a clear desire of some developed countries to free themselves from this Chinese dependence. Is that a risk for Chinese growth? – By Raphaël Rousselot

Because of how integrated China is in the world trade, and how it has emerged through the past two decades as the world’s factory, China has a very important role in global supply chains. As you highlighted, COVID-19 pandemic emphasized how interlinked the world market is. So, there is a desire, as you said, to build more resilience into countries and companies’ supply chains, by diversifying into other markets either nearer to the consumer market or a ‘friendly’ country, so-called near-shoring and friend-shoring. This supply chain diversification trend is expected to continue in the coming years. This is therefore a risk for Chinese growth, and the Chinese leadership recognized this risk, which is why they came up with the dual circulation strategy, where improving domestic circulation or domestic demand is a key to future growth. China is not abandoning trade and looking inwards, but they recognize that external markets may not provide the same level of growth compared to the past.

A few years ago, China was a top priority for a lot of companies, a market too big to be ignored. Has it changed? Are those companies choosing to look elsewhere now? – By Raphaël Rousselot

Global players are diversifying their supply chains to reduce their dependence on China. Multinationals like Apple, Sony, Samsung, Nike or Siemens to name few, have shifted some of their production lines out of China in Vietnam, Thailand or Malaysia. India as a fast-growing economy, is a logical alternative, with its young unskilled workforce and with labor costs that are lowered than China. 

However, the relocation of manufacturing facilities is not driven by economic considerations only. This is also the result of the ongoing trade tensions between China and the US on rising geopolitical risks in Asia Pacific region.

It has always been a topic for risk manager, but what we see is that political uncertainty is now one of the main, if not the first, source of concern for risk cover companies. It was not the case a couple of years ago.

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Asian Risks Management Services Limited (ARMS) is an international consultant advising clients on insurable risks. Independent from any insurance providers, ARMS acts to the best of our clients.