China Makes Surprise Policy U-Turns in Quest for Growth

China’s run of policy U-turns is spurring optimism that an economic rebound will soon follow.

The abrupt scrapping of strict Covid restrictions in early December has been swiftly followed up by other market-friendly changes, as Bloomberg News reports here. China is ending a two-year ban on Australian coal imports, easing up on tech giants like Alibaba and dialing back the stringent “three red lines” that exacerbated a property meltdown.

Hao Hong, chief economist at Grow Investment Group, called China’s recent changes “breathtaking,” noting there were “policy pivots in just about every single sector.”

“The environment is more friendly but clearly there are lingering concerns,” he said. “Implementation, consistency and follow up are key.”

For now, market players are enjoying the ride up. Tech giants Alibaba and Tencent have gained some $100 billion of market value in 2023, after a year that saw both shed more than a quarter of their capitalization, while the MSCI China Index is up roughly 50% since reaching an 11-year low in October.

China’s economy is now forecast to expand by 4.8% this year, compared with little growth in the US and a potential contraction in the euro zone, according to data compiled by Bloomberg. Some are even more optimistic.

Morgan Stanley just raised its 2023 GDP growth target by another 0.3 percentage point to 5.7%, betting the near-term pain of a fast reopening will be compensated by an earlier and stronger recovery.

“We believe the market is under-appreciating the far-reaching ramifications of reopening and the possibility that a robust cyclical recovery can occur despite lingering structural headwinds,” economists including Robin Xing wrote in a note Monday. “Economic, regulatory and Covid policies are aligned for the first time in four years, likely resulting in stronger spillover from existing and upcoming easing.”

So what’s led to the changes? Well, in China’s opaque political system, no one can really be sure. President Xi Jinping secured a third term in October, so perhaps he’s calling for the turnaround.

Or maybe it stems from a broader recognition that the previous policies were doing too much harm to the economy. Rare anti-lockdown protests may have also contributed to the shift away from Covid Zero settings.

Whatever the impetus, investors are hoping the growth-friendly stance will endure.

“We will see fewer policies in 2023 that lead to market shocks and loss of market confidence, given some lessons that Beijing (or Xi in particular) learned about messing with key sectors,” said Adam Ni, publisher of the China Neican newsletter on Chinese politics. “But will I bet my house on it? No. We just don’t know.”