Summary

Supply chain and labour market impacts from Omicron and reopening are milder than expected. This improves the outlook for activity and reduces the potential policy constraints from inflation risks. The rebound to supply is expected to outpace the demand recovery. This, along with weakening foreign demand, risks extending the destocking cycle. PRC continue to expect deregulation (big tech) and decentralization (local fiscal) to be key investment themes for 2023. However, temporary policy reforms without structural political reforms will limit the systemic response.

Despite the collapse of the ZCP, politics is not dead. The political leadership will decide the extent of easing in key areas (big tech and property). CCDI has downgraded anti-corruption efforts to focus on “integrating supervision with governance”, implying a focus on KPIs set in Beijing. Where it comes to technocratic macro policy, local officials are still confused about how to combine political obligations with growth support. The NPC will be key to set the tone for local officials. For full-year 2023 expect modest headline policy impulses, but in the short-term expect fiscal and credit front-loading and overshooting. Big numbers from February through say April may provide markets with another round of euphoria. However, this policy impulse should taper during the second half of Q2, and this is where euphoria might end. In the short-term this is bullish for developer stocks and bonds, and equities generally. For the RMB, we see clear room for depreciation, but this is not a high conviction call yet.

The property sector overhang looks worse than 2015 and more dedicated policy support is needed to reflate asset prices. A “whatever it takes” stance from PBOC would be consistent with short-term credit overshooting. However, “housing [is still] for living” in China and we do not expect significant support for the front-end of the property cycle. Opportunities are there for dramatically expanding public policy housing, but supporting political conviction appears tepid. The seasonal recovery to construction activity may be delayed, depending on how many and how quickly migrant workers return to sites. The combination of reopening and policy front-loading is bullish in the short-term, but may disappoint later. PRC also have a bullish view on China’s contribution to crude and gold demand, with the latter a secular theme as part of de-dollarization. Other aspects of the consumption narrative will remain unbalanced.

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