Why Investors Should Worry Less About China's Recovery

Though recent data suggests China's re-opening growth has slowed, it's likely temporary. As China's recovery continues, it may have implications for U.S. inflation and rates.

After an initial bump, China's post-zero Covid economic recovery appears to have slowed: April retail sales, factory production, and fixed-asset investment, as well as May manufacturing data, all fell short of analyst expectations. But there are reasons for hope, says Jeffrey Kleintop, chief global investment strategist at Schwab. "We believe China will zig while the rest of the world zags in 2023, with accelerating growth and additional stimulus relative to 2022, while other countries slow down and withdraw stimulus." The longer-term worry could be a revitalized China becoming a roadblock in the Federal Reserve's inflation fight.

Stimulus, consumer confidence, diplomacy: Three routes to growth

According to a Bloomberg survey of analysts in late May, the People's Bank of China (PBOC) is expected to cut reserve requirements for major lenders by 25 basis points by the end of the third quarter of 2023. Cutting reserve requirements helps a central bank stimulate economic growth without reducing interest rates.

Additionally, the PBOC has kept interest rates steady for nearly a year at levels below those of Europe and the United States, something it's been able to do in part because inflation remains low. That makes China a more attractive lending environment than many of its global peers. And some analysts think China might reduce rates later this year, though not all economists agree.

With more time and potentially lower rates, consumer confidence could rebound—a vital ingredient for sustained economic growth. Right now, Chinese consumers still appear to be worried about jobs, incomes, and the property market, Jeffrey says. They have used savings to pay down mortgages, and spending has been primarily on experiences. For instance, domestic travel bloomed after the country's reopening but consumers shied away from expensive capital goods.

While consumers appear to remain conservative about the kind of big purchases that can fuel stronger economic growth, auto sales, and production have been bright spots. Second-quarter retail sales growth is expected to improve significantly from the first quarter, according to Trading Economics.