• The prioritisation of consumer spending in the economic agenda for 2023 heralds the lifting of remaining covid‑19 restrictions and subsidies to consumers, although investment will remain prominent. 

• A pro‑growth stance warrants the suspension of economically disruptive policies in technology regulation, property, decarbonisation and income redistribution, but policy twists and turns risk undermining the predictability in the business environment.

• Government concerns over fiscal and debt sustainability will lead to a dilution of tax cut programmes and constrain issuance of local debt in 2023.

The annual central economic work conference (CEWC) was held on December 14th‑15th, during which Chinese leaders reviewed the economy in 2022 and set the policy tone for 2023. Economic development was affirmed as the priority for the first time since 2015, after a period in which authorities sought to balance growth with other themes, such as deleveraging. That, along with a mix of policies aimed at boosting demand and easing regulations, will underpin a more positive outlook for China’s economy, after a turbulent year characterised by covid-related lockdowns, flagging growth and rising unemployment.

Consumer demand to lead a recovery

Boosting consumption has been prioritised over government investment in the economic agenda for 2023, although EIU expects both to play a sizeable role. While the pivot to consumer spending matches the government’s long-term desire to expand domestic demand (on which the central government issued a 12‑year strategy recently), we interpret it as a response to an anticipated slowdown of another economic driver, exports. Government investment, including in infrastructure, will maintain some momentum at least in the first half of 2023 before consumer confidence recovers.

We continue to expect consumption recovery to be more substantial in the second half of 2023: a marked improvement in consumption rests first and foremost on how China will manage its reopening. Confirming that the country is now in a “new stage” of pandemic control, the CEWC underscores the need to “improve conditions conducive to consumption”. This implies the continued relaxation of remaining covid-related restrictions over the earlier part of 2023, which will set the stage for a normalisation of consumption once the wave of infections subsides (likely by the end of the first quarter). The risk of re‑tightening controls will therefore be low, unless a far deadlier variant of the virus emerges. 

The recovery in consumption will be catalysed by moderate levels of incentives provided by local authorities. These, including consumer vouchers and tax exemptions, will seek to boost spending on tourism, recreation, new-energy vehicles and elderly care (the latter two are highlighted in the readout). In the light of strains in the public finances at local levels, efforts in that regard could receive support from the central government, including through higher levels of fiscal transfer. However, we maintain our view that large-scale cash handouts—akin to those introduced in developed economies at the height of the pandemic—are off the table, owing to their links to welfarism and concerns over their inflationary impact.

Disruptive regulations to take a back seat—for now

The government has reversed its position on several areas of the economy that have been under regulatory scrutiny. This includes the “platform economy” (a code word for China’s big tech companies), a segment that has been battered by regulatory tightening and deepened China’s economic plight since 2021. Authorities explicitly voiced their support for internet platforms in leading growth, creating jobs and participating in international expansion. It is a sharp reversal of the earlier focus on curbing anti‑competitive behaviours, privacy violations, labour exploitation and other behaviour that the government saw as “disorderly expansion of capital”. We nonetheless believe that this is a reprieve. Many issues that underwent central-government scrutiny continue to lack clear regulatory frameworks, pointing to the need for further overhauls. The CEWC itself highlighted protecting the rights of “gig economy” workers, which will require reform of the national social security programme and will not sit well with many big tech companies.

The readout also highlights the more pressing need to defuse risk in the property sector and support housing demand, even though the long-held principle of “houses are for living in, not for speculation” is preserved. That message is echoed by the rare reaffirmation of property as an “economic pillar” by a vice‑premier, Liu He, days prior to the conference. The policy direction is in line with our expectations that policymakers are keen to “remodel” the debt-stricken sector while avoiding a “hard landing” that would implicate banks, although the upbeat message heralds stronger demand-side support, such as mortgage rate cuts, tax concessions related to property transactions and lowering down payment requirements. A blanket bail‑out of distressed developers, regardless of their asset quality and credit history, remains outside our assumption. 

Other economically disruptive measures—including common prosperity and decarbonisation—will take a back seat in 2023 as well. These themes still feature in the government’s long-term development goals, but their declining importance (or outright absence) in the readout of the CEWC points to the postponement in areas such as income redistribution reform and carbon market expansion. We are concerned, however, that enforcing aggressive regulatory actions during good times and suspending them during bad times only adds unpredictability to the business environment. Uncertainties over whether the loosened regulations can last will cloud business prospects and investment.

Fiscal expansion will continue, but no more massive tax cuts

The readout calls for increased and more efficient public spending, but growing concerns over fiscal sustainability will prompt authorities to opt for a more moderate level of fiscal expansion. The term “local government debt risk” appeared three times in the document, which is unusual given the declining prominence of the topic since 2019. Pressure over debt servicing might have already risen to dangerous levels in some localities at the risk of triggering painful fiscal restructurings. 

To that end, we expect the government to stop offering dramatic tax rebates seen in 2020 and 2022. Officials removed the reference to massive tax cuts (compared to last year’s readout), which eased business burdens during the pandemic shocks but led to the deterioration in actual fiscal deficits in 2022. Similar considerations could also constrain the local debt borrowings, especially in the form of special bonds, which have experienced a surge in issuance at the expense of a growing repayment burden. The remaining spending gap will, as we previously highlighted, be met by increased leverage from the centre, including a wider general budget deficit and the use of non‑budgetary tools such as policy bank credit.

The focus of fiscal spending will also be different as China shrugs off the heavy burden associated with the enforcement of zero-covid controls. Our analysis of the readout identifies the following priority areas: the aforementioned incentives to boost consumer spending; a moderate increase in public investment; and last but not least, interest subsidies to select sectors in support of China’s industry policy, which has risen in prominence as the technology competition with the US intensifies. 

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