China's National Health Commission announced the end of the Communist Party's "dynamic zero-Covid" policy on December 7. It did not take long for Wall Street to crank up the optimism machine. Morgan Stanley, on the following day, issued a research note predicting that Chinese equities would outperform emerging markets and global peers.
Since then, financial analysts have been falling over themselves to say how China's stocks will continue to soar this year.
Stocks may soar for a while, but China's economy is far sicker than analysts assume.
At the heart of the sunny views is how fast China has put COVID-19 behind it.
On the eve of the Lunar New Year holiday in China, often called the "world's largest human migration" and therefore a potentially superspreader event, Wu Zunyou, the chief epidemiologist of the country's Center for Disease Control and Prevention, said that 80% of China's population had already been infected.
At the end of the holiday, the Center reported that there were 6,364 deaths between January 20-26 in hospitals, almost half the number of deaths in the preceding week.
Beijing's position is that the disease has already peaked so that further spread is unlikely.
No wonder investors are exuberant. Covid relaxation is central to the idea that China's economy will produce solid growth. Bulls, aided by Communist Party and central government propaganda, make the argument that the end of disease-control measures— China maintained one of the world's strictest set of rules for three years — will result in a binge of "revenge spending."
"Chinese consumers, trapped inside their apartments during parts of the pandemic, accumulated more than $2.2 trillion in bank deposits last year, which should fuel more spending," the Wall Street Journal reported this month. The Financial Times put the figure at $2.6 trillion.
Is the bull case correct? There are four primary reasons to doubt it.
First, China's disease statistics are questionable. "China Portrayal of Smooth Covid Exit Leaves Scientists Wanting More Data," a polite Wall Street Journal headline put it.
Beijing is asking the world to believe that SARS-CoV-2, the pathogen causing this disease, is behaving differently in China than it has in all other parts of the world. If this claim is false, as it almost certainly is, there will be a follow-on wave of infections in the country this spring, as disease modelers have been predicting.
Second, even if China were over Covid as the regime maintains, the economy is still plagued by its over-dependence on property, which accounts for almost 30% of GDP. Prices and sales have been plunging since late 2021, when Beijing finally restricted imprudent lending to big developers, most notably China Evergrande Group, now in default.
Housing is critical because it also accounts for about 70% of the wealth of the middle class. The Chinese people have powered the economy with spending when property prices were rising, either because they were reaping gains on sales or because of the "wealth effect," the circumstance that people tend to spend when they feel their assets have gone up in value. Now, the opposite of the wealth effect is depressing consumption.
"The property sector downturn is hard-wired into the first half of 2023," reported the Rhodium Group last month, in an analysis on China's economic prospects.
That means a downturn in first-half GDP is also hard-wired.
Third, the Chinese economy is far weaker than Beijing claims. The National Bureau of Statistics reported that GDP grew 3.0% last year, but that is highly unlikely.
More probably, as Anne Stevenson-Yang of J Capital Research tells Gatestone, the economy in fact contracted. The poor economy, like the property downturn, appears to have crimped consumer spending. The general downbeat mood of the Chinese people will convince them to save more than analysts think.
Fourth, the regime during the pandemic did almost nothing to remedy the principal structural flaw in the Chinese economy: the overreliance on government spending, which over decades has resulted in overbuilding and therefore created mountains of questionable debt. Gregory Copley, the president of the International Strategic Studies Association, tells Gatestone that "the fundamentals of the Chinese economy have already been destroyed, so the optimism about the reversals of Communist Party policy on Covid management will be short-lived."
"China is back," is how the Financial Times summarized the message of Vice Premier Liu He to the just-completed World Economic Forum gathering in Davos. Maybe so, but it is back to the old faulty economic structure.
"China is too optimistic about a quick economic turnaround in 2023 following the Covid lockdowns," Andrew Collier, an analyst at Global Source Partners, said in e-mail comments to this publication. "Local governments are running huge financial deficits, many people are holding on to cash because they are worried about their health, and the downturn in the property market has affected people's retirement savings."
Collier, based in Hong Kong, thinks wealthy consumers may buy high-end imports so the overall impact on the Chinese economy "will not be large."
Collier therefore believes there will not be an uptick until 2024.
In any event, Copley, also editor-in-chief of Defense & Foreign Affairs Strategic Policy, says that "foreign analysts of mainland China's economy have always engaged in wishful thinking, and there is now an air of desperation."
China is not going to have a good 2023 or a good 2024. Foreigners are going to lose money in China again.
Gordon G. Chang is the author of The Coming Collapse of China, a Gatestone Institute distinguished senior fellow, and a member of its Advisory Board.