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2023-01-22 – China Q4 GDP Beats Estimates

2023-01-22

China Q4 GDP

Beats Estimates

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This Week's Topics

COVID Update
2022 Q4 GDP Beats Estimates
2023 Oil Forecast
SINOLOGIX Commentary

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The last few weeks have seen remarkable changes in China – the (reported) COVID numbers have stabilized and even declined in some provinces, 2022 Q4 GDP numbers (vastly) exceeded analysts’ expectations, a projected 5.2% GDP growth target for 2023 is driving demand for oil, and the latest Bureau of Statistics reports confirm a population decline. A lot to digest…
SINOLOGIX Staff
www.sinologix.io
info@sinologix.io
2023-01-17
Weekly Recap for: 2023-01-22

COVID Update

Post COVID Lockdowns

In a stunning reversal of its draconian “zero-COVID” strategy, the National Health Commission of the PRC overturned most of its onerous epidemic-related policies in a 10-point update issued on December 7, 2022. See 2022-12-04 – Beijing Relaxes COVID Policies.

Most western media promptly predicted a massive wave of COVID-related deaths that would follow the government’s policy reversal, and most new reports have focused on anecdotal evidence that as many as several hundred million people have been infected. The WHO has claimed that the China CDC is consistently under-reporting infection rates, hospitalizations, and COVID-related deaths.

SINOLOGIX noted two critical factors in our December 4, 2022, report on the unique aspects of the epidemic in China and the government’s revised policies, which we believe are still relevant:

  • On the one hand, the earlier strict lockdown policies left the population with significant deficit in natural immunity, which would indeed result in a major spike in infections.
  • On the other hand, because the virus has devolved to highly infectious, but less virulent variants, the corresponding hospitalization and death rates would not be nearly as dramatic as those experienced by the US in the earlier stages of its epidemic.

The true situation remains unclear – in late December, NPR and other media outlets quoted government officials in Zhejiang that that province was experiencing 1 million new cases per day. Bloomberg reported that officials in Beijing had conceded that as many as 250 million people had been infected since the lockdown policies were rescinded. And on January 14, 2023, the WHO’s Director-General issued a not-so-subtle press release calling for more accurate data from the Chinese CDC.

Revised Threshold for COVID-related Deaths

Western media similarly criticized China’s revised policies related to tabulating deaths due to COVID-19, which exclude deaths where patients had pre-existing conditions.

Notwithstanding concerns over the Chinese CDC’s criteria for determining fatality rates, it’s worth noting that the coding protocols in western countries such as the US and the UK may have dramatically overstated COVID-19 deaths by counting any fatality as COVID-caused if the patient had previously tested positive, regardless of  any pre-existing conditions.

Image of Coronavirus
Image - Shutterstock / CKA
(tap image to expand)

Q4 GDP Beats Estimates

Economic Turnaround (relatively speaking)

On January 16, 2023, the Chinese Bureau of Statistics released its 2022-Q4 GDP – with the perennial caveat that its numbers are sometimes out-of-sync with observable economic activity, China spectacularly beat expectations.

2022-Q4 GDP Data

(swipe on column 2 to scroll table)

Data Source – PRC Bureau Statistics

While 2022-Q4 GDP was down from Q3’s +3.9% YoY growth rate, attributable to the impact of China’s “zero-COVID” policy, it nevertheless still represents solid growth in an extremely challenging economic climate.  Analysts had anticipated a dramatic 9.0% drop in retail sales, due to lockdowns, so the 1.8% drop was a relative beat.

Property Sector
Taming World’s Largest Asset Class Bubble

The biggest drag on the economy  remains the housing market, which had a meager .1% improvement over the first 11 months of 2022. The government remains locked in a tug-of-war between supporting one of the foundations of Chinese citizens’ wealth management and the debt crisis spawned by over-extended developers.

To put this in context, the Chinese property market was valued at $62 trillion in 2020, compared to the US fixed income and equity markets, valued at $48 trillion and $47 trillion, respectively.

Investment Asset Classes ($trillion) (2020)

(click/tap legend to filter data)
Investment Asset Classes ($trillions) (2020)

Data Source – Goldman Sachs

Three Red Lines

To reign in the out-of-control debt crisis in the property market, Beijing implemented its so-called “Three Red Lines “ policy in August 2020, which was positioned as a key program of Chairman Xi Jinping’s common prosperity initiative. Three Red Lines was designed to reduce developer leverage and reduce financial sector exposure while making home ownership more affordable. The program’s three red lines included:

  • 70% ceiling on the debt-to-asset ratio (excluding advanced receipts)
  • 100% cap on the net debt ratio
  • 100% cap on short-term debt/cash ratio

 

Developers were limited to a maximum 15% debt growth, adjusted down by 5% for each of the “red lines”  violated by any company – for example, a company that violated all three red lines would have debt growth limited to 0%.

Predictably, the Three Red Lines policy choked off liquidity for most of the highly-leveraged property developers, which triggered a collapse in the housing market – property developers, notably Evergrande Group (China’s second-largest developer), were forced to restructure their debt, housing prices started sliding, and residential property sector lurched into a protracted downturn. Perhaps more than the “zero-COVID” policy, Three Red Lines had a greater impact on the Chinese economy – the real estate sector accounts for 29% of the total GDP and 30-40% of total bank loans.

Concurrent with its reversal of the strict “zero-COVID” policy, Beijing quietly indicated that the Three Red Lines policies would be scaled back, with the government easing the strict debt limits noted above.

Beijing’s reversal of the “zero-COVID” and Three Red Lines policies has prompted both the government and analysts to sharply upgrade China’s prospects for 2023, with estimates ranging from 4-5%.

Naturally, this has cascaded to a forecast for substantially increased demand for oil and energy products (see below).

Record Oil Demand Forecasted for 2023

Updated Forecast

The economic impact of the downturn in the real estate sector and Beijing’s “zero-COVID” policies triggered a downturn in oil imports in 2022, the first downturn in 20 years.

Analysts have responded favorably to the government’s tacit acknowledgement that the “Three Red Lines” and “zero-COVID” policies wreaked havoc on China’s economy. Thus, with the (at least partial) lifting of these two programs, economists are forecasting 4-5% GDP growth in 2023, which in turn will drive an increase of 800 – 970,000 bpd in oil imports.

Chart – China Oil Demand (2000 – 2023)

(click/tap legend to filter data)
Chart – China Oil Demand (2000 – 2023)

Data Source – US Energy Info

Sino-Saudi Summit - Prescient Diplomacy

In hindsight, Chairman Xi’s diplomatic summits with Saudi Arabia and the Gulf Cooperation Council (GCC) are proving prescient – China has secured contracts with several Mid-East countries that will ensure uninterrupted oil supplies for the foreseeable future.

The oil sector has a mutually beneficial relationship with China – at 23% of the total crude oil market, China is by far the world’s largest oil importer. The International Energy Agency has forecasted growth in the crude oil market of some 1.7 million bpd, of which China will account for some 47%.

Global Oil Importing Countries

(click/tap legend to filter data)
Global Oil Importing Countries

Data Source – Worlds Top Exports

Brent crude has been hovering around $86 per barrel – Goldman Sachs analysts predict that will rise to $110 per barrel, in large part driven by China’s increased oil imports.

The Russia and Iran Factors

Despite sanctions over the Russian-Ukrainian War, Russia has remained a strategic oil supplier to China – in 2022, it was second only to Saudi Arabia with 1.72 million bpd imported by China. This represented an 8% increase over 2021.

The salient point in this metric is not the oil itself, but rather, China’s commitment to a strong working relationship with Russia that is oblivious of any US/EU sanctions. China’s state-owned refiners have wound down the purchase of Russian oil since November, but private sector refineries have picked up the slack by purchasing through intermediary traders who shield them from possible secondary sanctions.

Similarly, China imports from Iran rose to a record 1.2 million bpd, up 130% from a year earlier, likewise purchased through intermediaries due to US sanctions against Iran.

Conversely, imports from the US were down 31% from 2021.

SINOLOGIX Analysis

Chinese CDC COVID-19 Statistics

We would argue that the truth regarding total infections, hospitalizations, and deaths after the policy change on December 7, 2022 may never be known. Estimates by western analysts vary widely, but some project hundreds of millions of COVID-19 cases and at least one million deaths. While the absolute number of infections and deaths seems high, the per capita rates are still well below the averages for the US and most western countries.

We would further argue that these statistics may not be material, considering the 2022 Q4 GDP numbers just released by the government, as well as its forecast for oil imports for the rest of 2023 (see above).

Rather than focusing on the immediate spike after the December policy change, which everyone expected to be high, we believe the per capita infection, hospitalization, and death rates in the coming months (and all of 2023) will be a better metric by which to evaluate the government’s policies. And since we’re talking about the second-largest economy in the world, industrial output and consumer sales may be a more accurate, if not indirect, way to measure the severity of the latest wave of the COVID-19 in China.

And finally, western media criticism of Beijing’s handling of the epidemic is a bit disingenuous – independent analysis, and in some cases, government-sponsored analysis, increasingly demonstrates that the vaccine-intensive approach employed by most western countries, which rely on bivalent versions of the mRNA vaccines, has actually been counter-productive, with highly-vaccinated countries, such as Japan, reporting unusually high per-capita hospitalization and death rates among fully-vaccinated citizens.

Oil Demand

The projected record demand for oil is significant on several counts.

First, because most the forecasts are from western analysts, it tends to validate Beijing’s bet that relaxing real estate market and COVID-19 restrictions will have an immediate and material impact on its economy. Our experience on the ground in China is that it’s economy is one of the most policy-sensitive in the world. This is due in part to both the scale and speed with which Beijing implements new or revised policies.

Second, China’s sourcing model for oil, which is heavily reliant on two of the most heavily sanctioned countries in the world (Russia and Iran), emphasizes its multi-polar vision of the world. Both Russia and Iran are key members of BRICS+ and the Shanghai Cooperation Organization (SCO).

Finally, the financial stability that China provides Russia through its oil purchases alters the geopolitical dynamics of the Russian-Ukrainian War. As long as Russia has a steady income from its energy products, it can afford to maintain its strategy in the war. The grinding war of attrition in Ukraine is rapidly draining US and EU military inventories and budgets. However indirectly, China is facilitating a conflict that appears unwinnable for the US and its EU allies.

NOTES

References and Disclaimers

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Works Referenced

“China's Oil Demand Seen Hitting Record in 2023 on Covid Zero Pivot.” Bloomberg.com, Bloomberg, 12 Jan. 2023, https://www.bloomberg.com/news/articles/2023-01-12/covid-pivot-sets-up-china-oil-demand-for-record-high-this-year.

“China's Oil Demand Seen Hitting Record in 2023 on Covid Zero Pivot.” Bloomberg.com, Bloomberg, 12 Jan. 2023, https://www.bloomberg.com/news/articles/2023-01-12/covid-pivot-sets-up-china-oil-demand-for-record-high-this-year.

“China's Oil Imports from Russia up 8.2% in 2022 to 86.24 Mln Tons - Customs.” TASS, https://tass.com/economy/1564811.

“Covid-19 Data Explorer.” Our World in Data, https://ourworldindata.org/explorers/coronavirus-data-explorer?facet=none&Metric=Confirmed%2Bcases&Interval=7-day%2Brolling%2Baverage&Relative%2Bto%2BPopulation=true&Color%2Bby%2Btest%2Bpositivity=false&country=~CHN.

Durden, Tyler. “In Huge Policy Reversal, China Will Ease ‘Three Red Lines’ Rule to Kickstart World's Biggest Asset Bubble.” ZeroHedge, https://www.zerohedge.com/markets/huge-policy-reversal-china-will-ease-three-red-lines-rule-kickstart-worlds-biggest-asset.

Durden, Tyler. “‘A Historic Turning Point’: China Reports Blowout Q4 Economic Data as Population Falls for First Time in Decades.” ZeroHedge, https://www.zerohedge.com/markets/historic-turning-point-china-reports-blowout-q4-economic-data-population-falls-first-time.

Griffiths, Robbie. “China Has Stopped Publishing Daily COVID Data amid Reports of a Huge Spike in Cases.” NPR, NPR, 25 Dec. 2022, https://www.npr.org/2022/12/25/1145472905/china-stops-publishing-daily-covid-data.

Person. “Saudi Arabia Stays Top Crude Supplier to China in 2022, Russian Barrels Surge.” Reuters, Thomson Reuters, 20 Jan. 2023, https://www.reuters.com/markets/commodities/saudi-arabia-stays-top-crude-supplier-china-2022-russian-barrels-surge-2023-01-20/#:~:text=China's%20crude%20oil%20imports%20from,of%20Customs%20showed%20on%20Friday.

Schwaller, Fred. “China: More than a Million Could Die from Covid in 2023 – DW – 12/21/2022.” Dw.com, Deutsche Welle, 21 Dec. 2022, https://www.dw.com/en/china-more-than-a-million-could-die-from-covid-in-2023/a-64175560.

“WHO Welcomes Data on Covid-19 in China, Meeting with Minister.” World Health Organization, World Health Organization, https://www.who.int/news/item/14-01-2023-who-welcomes-data-on-covid-19-in-china--meeting-with-minister.

Workman, Daniel. “Countries.” 2021 Plus Average Unit Prices, https://www.worldstopexports.com/crude-oil-imports-by-country/.

Related Research and Articles

2022-12-04 – Beijing Relaxes COVID Policies

In this week’s recap, we discuss the history of China’s “Zero-COVID” policy, from lockdowns to protests to the recent reversal to a more relaxed approach to managing an endemic disease.

Retrieval Augmented Generation

Work in Progress...!

PLEASE NOTE – We’re in the process of developing a full Retrieval Augmented Generation (RAG) component that will tap into a database of economic, tech trends and other data associated with our research reports. This initial prototype includes content that we’ve already published in the form of text articles, but we’ll soon be adding structured content that will enable in-depth analysis not generally available through public chat apps.

Retrieval Augment Generation refers to generative AI that is supplemented with proprietary structured data, text, images, audio and video content that we have curated from our research.

Thanks for your patience! This initial prototype will soon be replaced with a more advanced UI capable of generating complete multi-modal reports. Please bear with us – this prototype is text and speech only.

Other Data Insights

"Things change gradually at first...

...then all at once..."

China GDP vs UST Holdings (2010-22) (billions)

(click/tap legend to filter data)
China GDP vs UST Holdings (2010-22) (billions)

Data Source – World Bank

Global FX Exchange Reserves (2001-22) (% of total)

(click/tap legend to filter data)
Global FX Exchange Reserves (2001-22) (% of total)

Data Source – World Bank

Global FX Exchange Reserves (2001-22) (% of total)

(click/tap legend to filter data)
Global FX Exchange Reserves (2001-22) (% of total)

Data Source – World Bank

Western media is starting to pay attention to China’s efforts to influence members of the so-called Global South, or more specifically the BRICS+ and Shanghai Cooperation Organization (with substantially overlapping membership), to denominate international trade in the Chinese Renminbi (RMB), aks the Chinese Yuan (CNY) and/or other local currencies. For very different reasons, Russia has promoted the idea of an entirely new currency for trade settlement. This is an accelerating trend among countries that have formed close economic and political relationships with China.

Coincident with the pivot to the RMB for trade settlement is a growing sentiment among the BRICS+ and SCO members that holding USD as their primary reserve currency poses a risk in the event the US declares sanctions and/or freezes a country’s assets, as happened with Russia and Belarus in 2022.  

The combined effect of these two trends should be observable in a country’s US Treasuries holdings, and that’s exactly what we’re seeing in the chart above – China’s USD and Treasuries holdings peaked at $1.277 trillion in 2013 and declined by more than 32% in 2022.

Things change “slowly at first, then all at once”...

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The so-called “de-dollarization” phenomenon is really a reflection of China’s ascendancy to superpower status – there can be no question it is the main driver behind the emergence of increasingly powerful inter-regional economic organizations, innovative trade agreements that circumvent the USD’s role as the world’s primary currency for trade settlement, and conceivably, the demise of the USD as the world’s de facto reserve currency. In this Part 1, we summarize the key factors that might trigger a future change in currency usage by China and its trading partners.

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In a historic turn of events, China has successfully brokered a groundbreaking agreement between long-standing rivals Saudi Arabia and Iran, marking a significant shift in the geopolitical landscape of the Middle East. The agreement, which focuses on reestablishing diplomatic ties, ending proxy conflicts, and enhancing economic cooperation, highlights China’s growing influence in the region and its expanding role as a global power.

2023-01-22 – China Q4 GDP Beats Estimates

The last few weeks have seen remarkable changes in China – the (reported) COVID numbers have stabilized and even declined in some provinces, 2022 Q4 GDP numbers (vastly) exceeded analysts’ expectations, a projected 5.2% GDP growth target for 2023 is driving demand for oil, and the latest Bureau of Statistics reports confirm a population decline. A lot to digest…

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Due to the recent COVID outbreak in the downtown Puxi District, the Shanghai office is closed to outside visitors. Please feel free to contact us via email or phone to schedule an online meeting.

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