Source: CICC Research

Authors: Li Yujie, Liu Gang, Wang Hanfeng

Abstract

Epidemic situation and prospect: policy continuous optimization, epidemic peak has passed, follow-up impact or decreasing

Since the end of last year, China's epidemic prevention policy has been continuously optimized. From the perspective of domestic policy, the focus of epidemic prevention has changed from non-proliferation to the protection of vulnerable people. From the perspective of border policy, "Class B Management" has made great adjustments to the entry and exit policy. At present, with the exception of inbound tourism, entry and exit has basically returned to normal, especially exchanges between Hong Kong, Macao and mainland personnel.

The peak of the epidemic has passed, the follow-up may be repeated, but the impact is decreasing. China Center for Disease Control and Prevention[1]It says the positive rate peaked on December 25, 2022, and the number of hospitalizations fell sharply. The search index of "fever" and other keywords in provinces and cities across the country reached its peak before December 25. According to overseas experience, after the first round of peak, due to different early infection base and policy restrictions, the follow-up shows three forms: 1) due to the high previous base, it is basically reduced to a negligible level, such as Europe, America and Vietnam; 2) there are still several rounds of repetition, but the peak decreases, such as South Korea, Singapore, Taiwan and Hong Kong, China; 3) the first round is strictly controlled, and the subsequent peak is higher than the first round, such as Japan. We believe that the impact of subsequent outbreaks on economic activity and assets may also be diminishing. Rhythmically, there is an average interval of 5 months from the first round overseas to the second round.

Where is the current repair location? Domestic consumption needs to be repaired; some overseas demand is structurally replaced, and China spillover is concerned.

At present, China is still in a period of rising consumption repair, and there is more room for consumption (especially offline). Unlike consumption, industrial production returned to more than the center of long-term growth in the second half of 2020. Compared with the absolute scale in 2019 only, the total industrial added value in 2022 exceeds 28.8% in 2019, while the total social zero only exceeds 7.8%. In consumption, online retail sales in 2022 are 40.4% higher than in 2019, and there is a large gap in offline consumption. By category, catering is more repaired (5.9% lower in 2022 than in 2019), while hotels (the average occupancy rate of star hotels in the first three quarters of 2022 is 38.1% lower than in 2019), transportation (passenger volume in 2022 is about 50% lower than in 2019) and box office (revenue in 2022 is 52.3% lower than in 2019). The slope of repair after the peak of the epidemic in January 2023 is generally high.

Overseas is at the end of repair; some service consumption is structurally substituted, focusing on China's spillover demand. Overseas consumption has entered a downward cycle, in addition to catering, some service consumption appears structural substitution, such as self-driving instead of public transport, tourism over business, online audio-visual entertainment instead of offline, and so on. There may still be room for some sensitive areas of Chinese demand, such as global outbound travel and global aviation kerosene consumption.

The global impact of post-epidemic restoration in China? The demand is greater than the supply, the service is greater than the goods, the domestic is larger than the foreign, and the periphery is larger than Europe and the United States.

Impact one: demand is greater than supply. Unlike the supply provided by China and the demand provided by the United States by 2022, we believe that the current slowdown in demand in the United States, excessive inventories and the improvement in the epidemic in China will make the impact of this round more reflected in demand than supply, which will have the following effects:

1) the growth momentum of domestic consumer demand deserves more attention.

2) while the domestic supply driven by overseas demand is still under pressure.

3) there will be periodic price pressure in areas where local supply releases slowly, such as tourism demand.

Impact two: services are greater than goods. Referring to the experience of overseas post-epidemic recovery, due to the small scale of China's direct fiscal stimulus and the lack of strong real estate cycle support, and the different starting point of repair (goods were restored to the pre-epidemic level in February 2021, the degree of repair of the growth center is also higher than that of services), so the elasticity of service consumption is higher than that of commodity consumption, as reflected in the high-frequency data during the Spring Festival. However, if the subsequent improvement in the real estate cycle is stronger than expected, the repair of commodity consumption in the post-cycle of real estate is also worthy of attention. For the whole world, China has a long-term commodity surplus and service deficit, and the impact of subsequent service import demand may also be greater than that of goods.

Impact three: domestic is greater than foreign. With the characteristics of consumer demand and service-oriented consumption, the impact of this round of restoration in China may be greater than that abroad. In addition to some service imports (outbound travel), service demand is also more localized, so the effect of exporting inflation overseas may not be as significant as the economic cycle that traditionally relies on real estate and infrastructure investment. At the same time, the supply source of domestic commodity consumption is also mainly domestic, so the demand for overseas goods import may also be relatively limited.

Impact 4: the periphery is larger than that in Europe and America. China's repair of overseas spillovers is reflected in two aspects: first, imports of services (outbound travel), with a higher proportion of neighboring countries, outbound tourism is mainly concentrated in the Asia-Pacific region (South Korea, Vietnam, Japan and Thailand account for the highest proportion of mainland tourists from 2018 to 2019). Second, some commodities are imported, and consumer goods such as electronics and spare parts, textiles and clothing are also mainly imported by neighboring countries, so we believe that the improvement of the domestic epidemic will be more sensitive to the impact of improving the current account surplus, capital flows and exchange rates of neighboring countries and regions.

Text

Epidemic situation and prospect: policy continuous optimization, epidemic peak has passed, follow-up impact or decreasing

In a series of reports such as "the repair path of overseas consumption and Market", "the repair path of overseas consumption and Market (2): the experience of Eurasian countries", "consumption characteristics and Market implications in the Post-epidemic era", CICC Strategy Group focused on the repair experience of the epidemic in major overseas markets and its implications for the Chinese market. This report will further explore the possible impact of changes in China's epidemic prevention policy on the global economy and markets in the future from a global perspective.

Policy optimization: from "non-proliferation" to "severe disease prevention"

Since mid-November 2022, "Twenty articles"[2]Since the introduction of the policy, China's epidemic prevention policy has turned and followed up one after another, such as the "New Ten principles".[3], "Class B Tube"[4]More policy requirements, from preventing the spread of the epidemic to "protecting health and preventing severe diseases", so as to minimize the impact of the epidemic on economic and social development.[5]It is of great significance to the follow-up economic restoration.

From the perspective of domestic policy, the focus of epidemic prevention has changed from non-proliferation to the protection of vulnerable people. It is mainly reflected in the following aspects: 1) the strictness of non-proliferation has decreased significantly. According to the requirements of the "Class B Tube" and the "New Ten articles" policy, isolation measures will no longer be implemented for people infected with the virus, close contacts will no longer be determined, high and low risk areas will no longer be delineated, nucleic acid screening will no longer be carried out, and it will be adjusted to "willing to check all", no longer check nucleic acid negative certificates and health codes for cross-regional mobile personnel, no longer carry out "on-the-spot inspection", and no longer need nucleic acid certificates and scanning codes to enter most places. These policies have basically lifted the restrictions on epidemic prevention in social activities, and although the risk of epidemic transmission has increased in the short term, it will help to restore economic vitality in the medium to long term. 2) the prevention and control of vulnerable groups is the focus of the new policy. At the prevention level, the policy continues to emphasize accelerating vaccine coverage among vulnerable groups (the elderly, people with high risk of infection, people with underlying diseases and people with low immunity, etc.) and promoting secondary enhanced immunization; do a good job in mapping key populations and classified and graded health services; and regular testing will continue to be carried out in places where vulnerable people, such as pension institutions, will continue to be tested regularly, and 48 hours of nucleic acid proof is still needed for foreigners to enter these places. From the level of treatment, we should take classified treatment, equipped with medical resources such as bed ventilator, and prepare drugs to protect critically ill patients and vulnerable groups to a greater extent with limited medical resources.

From the perspective of border policy, "Class B Management" has made great changes to the entry and exit policy, which is mainly reflected in the requirements of prevention and control, scope requirements and changes in exit policy.[6]We will further open up customs clearance in Hong Kong and Macao.

Specifically:

1) Prevention and control requirements: the entry quarantine shall be abolished and quarantine infectious disease management measures will no longer be taken for entry personnel and goods, but nucleic acid testing is still required for entry. Previously, in accordance with the provisions of the "20 articles," entry personnel need 5 days of centralized isolation + 3 days of home isolation, and important business and sports groups need to be "point-to-point" transferred to the closed loop management area. The "Class B tube" policy cancels the requirement of nucleic acid and centralized isolation for all members after entry, and only those who are negative for nucleic acid test 48 hours before coming to China, the health declaration is normal and the routine quarantine at the customs port is not abnormal can be released into the society. Hong Kong and Macao can enter directly without 7 days of other overseas residence history, but nucleic acid testing is required 48 hours before entry.

2) scope requirements: abolish the control on the number of flights, relax entry to study abroad, visit relatives and reunite, and fully restore inbound tourism in Hong Kong and Macao. "Article 20" abolished the circuit breaker mechanism of inbound flights, and "Class B" further abolished the control of the number of international passenger flights such as "five ones" and occupancy restrictions. The scope of entry personnel has been relaxed from business and sports mentioned earlier to visa facilities for foreigners to come to China, such as resuming work and production, business, studying abroad, visiting relatives, reunion, and so on. However, tourism entry has not been mentioned in the document, but inbound tourism from Hong Kong and Macao has been fully resumed.

3) exit policy: "Class B Management" refers to the orderly resumption of outbound tourism of Chinese citizens in accordance with the international epidemic situation and the service guarantee capacity of all aspects.

Epidemic impact: the peak of the first round has passed, and the subsequent impact may decrease.

The first round of epidemic: the peak has passed, the city is faster than the countryside, and the end of January is drawing to a close.

The peak of the first round of the epidemic in the country has passed. According to the release by the Chinese Center for Disease Control and Prevention on January 25[7]According to the article, the positive rate of nucleic acid and antigen test decreased after reaching the peak on December 25 and December 22, 2022 (29.2% and 21.3%, respectively) (5.5% and 4.5% on January 23). The number of inpatients (infected by COVID-19 in hospital) dropped by 84.8%. The epidemic strains of this epidemic were BA.5.2 and BF.7, and no new variants were found.

The search index of "fever" and other keywords in all provinces and cities reached its peak before December 25. Judging from overseas experience, the Alphabet Inc-CL C search index such as "fever" and "COVID-19 epidemic situation" is basically consistent with the trend of newly confirmed cases, and takes the lead in one to two weeks. The national overall epidemic situation search index, online consultation index and fever search index reached a peak around December 20, which is consistent with the above-mentioned CDC survey and research data. Among them, provinces and cities such as Beijing, Hebei, Tianjin, Hubei and Sichuan took the lead in reaching the peak, while Tibet, Hainan, Ningxia and Fujian lagged behind.

Chart: the positive rate of nucleic acid test peaked on December 25, 2022.

Chart: the "fever" search index in the United States leads the number of diagnosed people by 1 to 2 weeks.

Chart: the search index such as "COVID-19" in the United States is about 1 to 2 weeks ahead of the new diagnosis.

Follow-up effect: the lower the pre-infection, the higher the follow-up, and vice versa; the average interval of 5 months, the impact decreases

From overseas experience, after the first wave of Omicron infection, the subsequent epidemic shows three main forms:

1) it has basically dropped to a negligible level, mainly due to the high base in the previous period, such as Europe, the United States and Vietnam. Among them, due to the early liberalization of policies in Europe and the United States, several rounds of outbreaks since 2020 have accumulated a certain infection base, and there are no strict policy restrictions during the Omicron epidemic. Although Vietnam has strict restrictions on epidemic prevention in the early stage, the infection rate is relatively high during the Delta epidemic and the first round of Omicron (the highest daily positive rate is 99.6%). After the first round of impact in the above-mentioned areas, the number of new cases decreased significantly.

2) there are still several subsequent outbreaks, but the peak is even lower, such as South Korea, Singapore, Taiwan and Hong Kong. During the first round of the Omicron epidemic, the epidemic prevention policy applied some pressure to flatten the curve to control the infection rate. However, the epidemic situation still recurred and the peak decreased under the influence of new subspecies and gradual relaxation of policy.

3) the limit during the first round of infection is strict, and the subsequent peak exceeds that of the first round. If Japan adopts quasi-emergency management during the first round of Omicron, the cumulative infection rate from 2020 to April 2022 is only 6.4 per cent (the average of the above two categories is 22.5 per cent and 17.8 per cent respectively). After the policy was relaxed in March 2022, there was a higher peak of infection in the later stage.

The above experience due to new statistics, nucleic acid missed detection and asymptomatic infection and other factors, the new diagnosis data may be distorted, but generally speaking, the higher the early infection base, the lower the subsequent peak.

In terms of impact, the subsequent peaks significantly weaken the disturbance to the economy and the market. Take Alphabet Inc-CL C's retail entertainment travel index, for example, even in Japan, where the peak of the second round is higher than that of the first round, the decline is even smaller, as is Singapore, where there are still two peaks after the first round of Omicron. Our report on the repair path of overseas consumption and Markets (2): the experience of Eurasian countries pointed out that for the service market sector, after the first round of Omicron shocks, the follow-up epidemic mostly had no significant impact on the stock index excess performance.

Where is the current repair location? Domestic consumption needs to be repaired, some overseas demand is structurally replaced, and China spillover is concerned.

• Domestic: there is still room for repair in overall consumption, and there is more offline space.

Before analyzing the impact of the optimization of China's epidemic prevention policy, we first need to clarify the current global cross-section in their respective positions, which areas have room for repair. The repair cycle of China and overseas is misplaced. At present, China is in a period of repair rise, and there is more room for consumption (especially offline consumption), while overseas is already at the end of repair. the gap with the pre-epidemic is mainly reflected in the areas affected by China and service-oriented consumption.

China's repair space is mainly in consumption. Compared with production activities and online consumption, which are less suppressed by the epidemic scenario, overall consumption, especially offline consumption, has more room for repair. Generally speaking, the level of pre-production repair is relatively high, but consumption has not yet returned to the historical center; there is still a gap between some categories below the middle line of consumption and before the epidemic, and the level of online consumption repair is higher.

Production of vs. Consumption. Production has exceeded the historical growth center, but there is a large gap in consumption. Industrial production returned to above the center of long-term growth in the second half of 2020 and maintained a relatively high growth rate in the following two years. In terms of absolute scale, the total industrial added value in 2022 exceeded 28.8% in 2019. However, social zero is not only slow to repair relatively industrial production, but has not returned to the center of historical growth so far, and it slowed to an average compound growth rate of 2.0% in 2019 in the second half of 2022 (by contrast, the average annual growth rate in 2019 was 8.1%). And the social zero data are mainly commodity retail (service items only include catering retail). If the consumption of travel services is taken into account, the gap may be even greater than that before the epidemic.

Online vs. Offline. Online consumption has exceeded the 2019 level, but there is still a big gap in offline services. The increase in online retail sales in 2022 is as high as 40.4% compared with 2019, and there may be some offline consumption. For example, although catering income has declined, residents' food consumption expenditure has not decreased. The cumulative amount of retail sales of grain, oil and food in 2022 has increased by 28.5% compared with 2019, and beverages have increased by 44.0%. In addition, the cumulative retail sales related to "eating" in online retail data are still as high as 16.1% compared with the same period in 2022, higher than the 10.7% year-on-year growth rate of overall online retail sales.

According to the classification, the degree of catering repair is higher, while that of traffic, box office and hotel is lower, but the slope after the peak in January 2023 is larger. Catering: higher degree of repair (5.9% shortfall in 2022 than in 2019). In 2022, the food and beverage income of she Zizhong is basically in a negative growth range compared with the 2019 level (except for 0.4% and 0.3% CAGR growth in June and July), and 5.9% lower than in 2019 for the whole of 2022. Transportation: passenger traffic in 2022 is more than 50% lower than in 2019. In 2022, the combined passenger volume of railway, civil aviation and road has a gap of 54.4%, 61.8% and 72.7% respectively compared with the same period in 2019. According to the Ministry of Transport of China[8]According to the data, from the day before New Year's Eve to the sixth day of the first lunar month in 2023, there was a gap of about 46.7 percent between railways, highways, waterways and civil aviation compared with the same period in 2019, of which railways and civil aviation were only 19.2 percent and 29.1 percent respectively. Box office: revenue in 2022 is 52.3% lower than in 2019. In 2022, Chinese films grossed 29.6 billion yuan at the box office, with a total of 700 million moviegoers, down 52.3% and 58.0% respectively compared with the same period in 2019. The box office data of the Spring Festival 2023 (as of January 27, a total of 6.76 billion yuan) has exceeded the levels of 2018 and 2019, with ticket prices being the main contribution (the average ticket price is 17.0% higher than in 2019), and the number of moviegoers is on a par with 2019. Hotel: the average occupancy rate of 38.1% in the first three quarters of 2022 is lower than that in 2019. The average occupancy rate of star hotels in China was only 38.1% in the first three quarters of 2022, a decline of 17.1ppt compared with the same period in 2019, with a greater decline in five-star hotels (- 21.2ppt).

• Unlike at home, overseas is in the final stages of repair.

Under the influence of rising interest rates, a downward property cycle and a fiscal downturn, overseas consumption of goods, which had previously significantly exceeded pre-epidemic levels, is already in a downward phase. At present, the main gap in overseas consumption lies in services, and some service-oriented consumption has not yet been repaired to the pre-epidemic level. In addition, there is room for categories related to China's spillover.

There is a certain substitution effect in some categories of consumption under overseas conditions. In "the repair path of overseas consumption and Market" and "the repair path of overseas consumption and Market (2): the experience of Eurasian countries", we point out that, except for the earlier opening of Europe, most of the sample countries have a lower level of repair of service consumption than goods, on the one hand, it is limited by the stage of the epidemic. On the other hand, it is also the reason why the service repair period (which usually begins after the end of the first round of Omicron shocks in 2022) coincides with the macro cycle of economic deceleration. But we also observe that there may be some long-term substitution effects in some categories.

The mode of transportation is self-driving instead of public transportation. From the overseas point of view, after the improvement of population mobility-related epidemic prevention policies, such as the number of TSA security checks in the United States, public transport, places of entertainment and other travel data have been greatly restored, but the degree of self-driving repair is higher. The US Apple travel index shows that by April 2022 (the last time the data were disclosed), the US public transport travel index has basically recovered to the pre-epidemic level, but self-driving travel is much higher than that before the epidemic.

Travel is far more than business travel. From overseas experience, we can see that hotel and air ticket bookings have a higher repair slope during the recovery of service consumption, but according to the purpose of travel, travel and leisure bookings far exceed business travel, which occurs in Japan, EMEA (Europe, Middle East and Africa) and the Asia-Pacific region (data are not available in the Americas). The opening of business entry in superimposed countries is generally earlier. This may mean that some business travel activities are replaced by online meetings, but leisure tourism activities are less replaceable and more repaired.

Online audio and video entertainment instead of offline. Using the US box office as an overseas reference, there is still a 35.1% gap between the US box office in 2022 and 2019, which is significantly repaired with entertainment goods such as audio-visual equipment in US PCE consumption data, while entertainment services are slowly repaired, and the growth center before the epidemic has not yet been repaired to verify each other. It means that on the one hand, there is the influence that offline Quan Yin Entertainment is replaced by home audio and video, on the other hand, the film supply has not been completely repaired, which will lead to a gap in the overall repair level of the "supply-driven demand" media entertainment industry.

But the food and beverage has been completely repaired. From overseas experience, the number of OpenTable diners in the United States and Europe basically recovered to pre-epidemic levels as early as mid-2021.

Chinese demand has not yet been fully released, and there is still room for global travel with demand spillover. 1) the import of tourism services generated by China's outbound travel in 2022 is still half of that in 2019 (- 53.1%), and the number of air passengers from various countries has not been restored to the pre-epidemic level, even in Europe and the United States, which opened earlier (the details will be carried out in Chapter 3). The demand for Chinese outbound tourism is of great significance to the whole world, especially to the neighboring countries. 2) Aviation repair also helps to move up the aviation fuel demand curve. Restricted by air travel has not yet been completely repaired, aviation fuel consumption (four European countries, the United States, China, Japan and India combined) is still 20% to 30% less than before the epidemic. While future supply problems may still be the main constraint on most global pricing categories such as oil and gas, there is also plenty of room for repair when China's border policy changes boost global aviation demand or lead to an upward shift in the aviation oil demand curve.

What is the possible impact of China's post-epidemic restoration on the world?

Impact one: demand is greater than supply

China's higher production growth rate and lower consumption growth rate since 2020 are likely to be partially reversed in the future, with the economic impact from providing supply to the world to releasing demand. From 2020 to 2021, overseas countries, mainly Europe and the United States, created demand under strong monetary and fiscal stimulus, while countries dominated by China created supply under good control of the domestic epidemic, resulting in a rapid economic recovery of major countries in the world and a substantial expansion of global trade. China's share of global exports also rose from an average of 13.2% from 2018 to 2019 to a peak of 17.5% in 2020. Looking ahead, the optimization of China's epidemic prevention policy helps to repair consumption, while overseas inventories are too high, and the demand for Chinese supply has declined. We believe that China's policy optimization at this time will also change the consistent model of overseas demand and China's supply. Compared with Chinese production, which has declined in importance over the past two years, the economic growth driven by the repair of domestic demand in China will make the impact of demand on the world more than supply. This may have the following effects:

The demand driven by domestic consumption deserves more attention. After the epidemic, China's social zero data has been running at a level lower than that of the pre-epidemic growth center. The rebound of the epidemic in April and the end of 2022 further weakened its upward momentum of repair, and cumulative retail sales in 2022 decreased instead of increasing compared with 2021 (down 0.2%). On the global demand level, China's tourism import data is still half of what it was before the epidemic (specifically launched in the second section). From the perspective of the possibility of future restoration, the superimposed household savings and consumption scenarios are liberalized, and with reference to the experience of Japan and Singapore, the direction of consumption restoration is determined to be high, and the slope may be greater than that of production recovery.

Domestic supply driven by overseas demand is still under pressure. The decline in the real estate cycle represented by the United States and the decline in fiscal stimulus have slowed the growth of commodity consumption, and inventories have quickly turned into excess ("how much is the pressure of destocking and recession in the United States?" ") Looking ahead, we expect that increased recessionary pressure in the United States in the first half of the year will lead to a further decline in consumption. Therefore, China's exports may still face some pressure.

There will be periodic price pressures in areas where local supply releases slowly, such as tourism demand.

1) the high-frequency index of consumer demand has begun to be repaired, and prices are faster than volume in some areas. Calculated by the data Center of the Ministry of Culture and Tourism[9]，[10]During New Year's Day's holiday in 2023, domestic tourism increased by 0.44% compared with the same period last year; domestic tourism revenue increased by 4.0%; and during the Spring Festival holiday, domestic tourism outbound increased by 23.1% year-on-year, and domestic tourism revenue increased by 30% over the same period last year. The box office data of the Spring Festival in 2023 have exceeded the levels of 2018 and 2019, with ticket prices being the main contribution (the average ticket price is 17.0% higher than in 2019), and the number of moviegoers is on a par with 2019.

2) the clearing of micro-main body (such as the collapse of service-oriented enterprises) leads to the supply repair takes time. 3) according to overseas experience, in the period of service-oriented consumer repair, service-oriented inflation prices are usually higher.

Chart: from 2020 to 2021, Europe and the United States created demand, China created supply, and global trade expanded significantly.

Chart: after the epidemic, China's social zero data has always been running at a level lower than that of the pre-epidemic growth center, while the industrial added value has exceeded that of the past growth center.

Chart: the decline in the real estate cycle represented by the United States and the decline in fiscal stimulus have slowed the growth of commodity consumption, and inventory has quickly turned into surplus.

Impact 2: services are greater than goods

As we pointed out above, after the change of epidemic prevention policy, China's role in the global supply-demand relationship may shift from the supply side to the demand side. Referring to the experience of overseas post-epidemic recovery, because China's fiscal direct stimulus is small, there is no strong real estate cycle support, and the starting point of restoration is different, so the elasticity of service consumption is higher than that of commodity consumption. However, if the subsequent improvement in the real estate cycle is stronger than expected, the repair of commodity consumption in the post-cycle of real estate is also worthy of attention.

Commodity consumption is less affected by the epidemic, and the early repair is faster. The epidemic caused retail sales of goods and services to fall into a range of negative growth in 2020, but the decline in retail sales was lower (at its lowest point, cumulative year-on-year-17.6%, relative to catering revenue-44.3%), and repaired faster, reaching 2019 levels in February 2021. For the whole of 2022, retail sales in China will grow by 8.5% compared with 2019, with a compound growth rate of 2.7%, which is lower than the pre-epidemic growth center, but higher than services. Among commodity consumption, sports and entertainment (58.0% growth compared to 2019 in 2022), beverages (44.0%) and cultural office (37.5%) are the most repaired, while furniture (- 17.0%) and building decoration (- 7.3%) affected by real estate are less repaired.

The service is more affected by the epidemic, but it is more flexible after the peak, and there is still a lot of room for it. In social zero data, catering revenue in 2022 fell by 6.0% compared with 2019, with a compound growth rate of-2.0%. In addition to catering, we point out in the second chapter that there is still a gap of more than half between 2022 and 2019 in terms of passenger traffic (railway, civil aviation and road) and movie box office receipts, and the average rental rate of star hotels in China has declined by 17.1ppt compared with the same period in 2019. During the peak of the epidemic at the end of 2022, China's zero data catering revenue fell 6.3% month-on-month in December (- 0.0% month-on-month in 2021), while retail sales rose 6.5% month-on-month (0.6% in the same period in 2021). However, after the peak, the service consumption is more flexible and the space is relatively more. After the peak of the epidemic in January, high-frequency data such as box office and Spring Festival passenger traffic have been significantly repaired, especially the box office of the Spring Festival in 2023 has exceeded the pre-epidemic level.

For the world, China has a long-term surplus in goods and a deficit in services, and the demand for imports of follow-up services may be larger than that of goods. In addition to the fact that the merchandise trade balance turns negative in February 2020, the commodity item in China's current account is mainly characterized by a large surplus and plays more of the role of supplier and processor in the world. Since the epidemic in 2020, the merchandise trade surplus has expanded significantly, totaling US $1.8 trillion. However, the service deficit is mainly deficit, and the service deficit has narrowed since the epidemic in 2020.

The demand curve of commodity imports is difficult to break through the previous highs substantially. First of all, we pointed out above that the room for supply to continue to repair upward is limited, and except for some categories, the level of import repair in China is also relatively high, and the recent growth rate has slowed down significantly (three consecutive months of negative growth compared with the same period last year). Secondly, China is more in the processing link in the global industrial chain, and the import demand is also closely related to the global commodity demand. The decline in global demand for commodities may be partially offset by China's subsequent recovery, but relying solely on the economic repair of changes in China's epidemic policy will not be able to stimulate a new commodity cycle. The most exuberant period of Chinese demand for goods (global monetary and fiscal easing + US real estate upward + Chinese manufacturing export boom 2020-2021) may have passed. But the further strength of China's property policy is an upside risk, analogous to the global capital expenditure cycle driven by China's "shed reform" and supply-side reforms in 2015, when Chinese imports expanded sharply.

Tourism accounts for the highest proportion of service imports, but the repair level is the lowest and there is more room for repair. China's imports of services in 2022 are 7.2% lower than those in 2019. Tourism imports account for the highest proportion of service imports, accounting for 50% of all service imports in 2019, but the repair level of tourism imports is the lowest among all service imports, and the difference between tourism imports in 2022 and 2019 is 53.1%. The unreleased Chinese demand is one of the important reasons why global travel has not yet been repaired, which is also evident in the fact that the airport throughput of Asian countries is generally less repaired (South Korea's Incheon airport throughput in December 2022 is still 43.3% lower than that of the same period before the epidemic. The United States and Europe have a higher degree of repair). According to the China outbound Tourism Development report 2020 released by the China Tourism Academy, before the epidemic, China's outbound tourism was mainly destined for China, Hong Kong, Macao and around Asia. In Japan, for example, before the epidemic, half of the people entering Japan came from China. After the epidemic, the number of people entering the country dropped sharply due to border controls. After Japan opened the independent travel scheme in October 2022, the number of people entering the country increased significantly, but as of December 2022 and the same period in 2019, there was still a gap of 45.8%. The difference in the number of people entering from other places except China was only 15.9%. We believe that these countries are expected to benefit from the repair of China's tourism demand after the adjustment of immigration policy.

Chart: the repair level of service-oriented consumption is low, and the epidemic is also inferior to commodity consumption at its peak.

Chart: the service deficit is mainly deficit, but the service deficit has narrowed since the epidemic in 2020.

Chart: the peak of demand for goods may be over.

Chart: the repair level of tourism imports is the lowest among all service imports, with a difference of 53.1% between 2022 and 2019.

Chart: Asian countries' airport throughput is generally less repaired.

Impact 3: domestic is greater than foreign

With the characteristics of consumer demand and service-oriented consumption, the impact of this round of restoration in China may be greater than that abroad. In addition to some service imports (outbound travel), consumer demand is more characterized by localization (the scale of tourism import in 2019 is 1.7 trillion yuan, while the total amount of social zero is as high as 41.2 trillion yuan). As a result, the effect of exporting inflation overseas may not be as significant as the cycle of traditional reliance on real estate and infrastructure investment. At the same time, the supply sources of domestic commodity consumption are also mainly domestic (the total import of consumer goods such as food, textiles and clothing, cars, jewelry and other consumer goods in 2019 is about 2.9 trillion yuan, only 7% of the total)Therefore, the demand for imports of overseas goods may also be relatively limited.

Domestically, the change in epidemic policy ranges from confidence and scenario to economic repair. With the emergence of highly infectious Omicron strains in China since 2022, frequent outbreaks have led to uncertainty in epidemic prevention policies, which has brought economic uncertainty and affected consumption and investment decisions that rely on forward-looking expected income. Residents are uncertain about their future income or even employment, thus reducing consumption and investment and accumulating a large amount of savings (the CICC Macro Group estimates that China's accumulated excess savings from 2020 to now may exceed 4 trillion yuan). Enterprises are uncertain about their future operating status and income, and capital investment is also at a low level. After the change in epidemic prevention policy, looking beyond the short-term peak, the path has changed fundamentally, superimposed with previously continuously loose monetary and fiscal policies, and the cash on hand of enterprises and residents can all contribute to the upward repair of the domestic economy.

The upward direction of domestic growth has strong certainty, and the level also needs to pay attention to real estate in addition to consumption. From overseas experience, there are not many countries where the actual consumption of residents has been restored to the central level before the epidemic, and the intensity of repair is related to residents' income and consumption rate. Although the current consumption of Chinese residents remains to be released, weak overall income and fiscal orientation may mean that it is difficult for consumption to return to the pre-epidemic growth trend in the short term. In the context of weak exports, consumer repair is on the one hand, the ability to achieve better-than-expected economic growth may also depend on better-than-expected property repair and investment policies (but it also means that long-term structural adjustment needs to give way to short-term economic growth).

For foreign countries, changes in China's epidemic prevention policy may have little impact on supply and demand. From the supply side, the current overseas overall supply chain pressure has been significantly reduced, the short-term domestic peak phase will interfere with the supply chain, but regardless of the duration or extent, the impact may be smaller than that in April 2022. From the point of view of the demand side, as we discussed above, the future impact path may be mainly reflected in the spillover of service demand.

Supply: supply chain disruption may be lower than in April 2022. On the one hand, the global consumer demand for goods has declined, while the pressure on the supply chain (such as freight rates and the restoration of production capacity in other countries, etc.) has also been significantly alleviated, and the global supply chain pressure index has dropped from a high of 4.3 at the end of 2021 to 1.2 in December 2022; on the other hand, the impact of the current outbreak is relatively small compared with April 2022, both in terms of duration and the scope of the shutdown. For commodity prices, the impact of consumer repair alone may be small, but if the assumption of real estate recovery is superimposed, strong domestic demand may affect commodity prices, to the extent that domestic commodities > global pricing categories. At the domestic level, the repair of economic activity and rising electricity generation bring upward risks to thermal coal prices; if effectively boosted by superimposed real estate investment, ferrous metals may be expected to strengthen. At the global level, while future supply issues may still be the main constraint on most global pricing categories such as oil and gas, the boost to global aviation demand from changes in China's border policy may lead to an upward shift in the aviation fuel demand curve.

Demand: mainly reflected in the spillover of service demand. Compared with the consumer demand for goods, the import of tourism services generated by outbound tourism is still half the gap compared with that before the epidemic.

Chart: residents are uncertain about their future income or even employment, thus reducing consumption and investment and accumulating a large amount of savings.

Chart: judging from overseas experience, there are not many countries where the actual consumption of residents has been restored to the central level before the epidemic.

Chart: the global supply chain stress index has fallen from a high of 4.3 at the end of 2021 to 1.2 in December 2022

Chart: the boost of China's border policy change to global aviation demand may lead to an upward shift in the aviation fuel demand curve.

Impact 4: the periphery is larger than that of Europe and the United States

Among China's service consumption imports, tourism from neighboring countries accounts for a higher proportion, and outbound travel is mainly concentrated in the Asia-Pacific region; in the import of goods, in addition to raw materials and resource goods, which are particularly dependent on the place of production, consumer electronics are also mainly imported by neighboring countries.

After the change of China's exit policy, the tourism industry of neighboring countries or regions has more room for repair. At the beginning of the outbreak in 2020, countries' strict border control measures led to a significant impact on cross-border tourism. With the increase in the proportion of vaccination in 2021, countries have liberalized their immigration policies one after another, especially in Europe and the United States, epidemic prevention policies have changed earlier, cross-border tourism has been better repaired. For China's neighboring countries, after the current changes in domestic outbound policy, according to overseas experience, short-term outbound tourism demand is difficult to rebound quickly, and we still need to go through the labor pains; but in the long run, we believe that consumption upgrading is still the general trend, and cross-border tourism is expected to pick up growth again thanks to the recovery of national tourism demand.

From a country-specific point of view, the restoration of tourism in Japan, South Korea and Southeast Asia is worthy of attention. According to the China outbound Tourism Development report 2020 released by the China Tourism Academy, the top 10 outbound tourism destinations in China (mainland) are Macau, China, Hong Kong, Vietnam, Thailand, Japan, South Korea, Myanmar, the United States, Taiwan and Singapore, most of which are Asia-Pacific countries or regions.

According to the data of tourist sources from various countries, except for China, Hong Kong, Macao and Taiwan, the countries with the highest proportion of Chinese mainland tourists from 2018 to 2019 were South Korea (33.3%), Vietnam (32.1%), Japan (28.6%) and Thailand (27.6%). While Europe and the United States such as Germany and the United States were only 4.0% and 3.7% respectively.

From the point of view of the degree of repair, except that Thailand's total abolition of immigration measures and tourism incentive policies in October 2022 led to a surge in the number of tourists in November 2022, which greatly exceeded the pre-epidemic level, the repair level of tourists from most of China's neighboring countries and regions was even lower. except China, Hong Kong, Macao and Taiwan South Korea (the latest value has a gap of-68.3% compared with the same period in 2019), the Philippines (- 59.4%), Singapore (- 46.0%) and Japan (- 45.8%) all have about half of the gap with the same period in 2019, and the United States and Germany have higher levels of repair (the gap is-22.0% and-23.2%, respectively).

Domestic consumption repair may provide a partial boost to exports of neighboring countries. Taking the import data in 2019 before the epidemic as an example, 1) Integrated circuits accounted for one of the largest imports of Chinese mainland (7.8 per cent) except crude oil (13.1 per cent). Integrated circuit imports mainly come from South Korea (27.7%), Taiwan (26.7%), Malaysia (7.8%) and Singapore (7.7%). 2) 51.8% of Chinese mainland's telephone imports come from Vietnam and 22.2% from South Korea. 3) the main suppliers of textile and clothing products and their raw materials are also countries and regions around China. For example, 20.6% of knitted T-shirts and 42.3% of pure cotton yarn are imported from Vietnam. 4) Automobile imports are mainly from Germany (38.7%), Japan (17.1%) and the United States (16.7%).

Chart: apart from China, Hong Kong, Macao and Taiwan, the countries (regions) with the highest proportion of Chinese mainland tourists from 2018 to 2019 were South Korea, Vietnam and Japan.

Chart: 51.8% of Chinese mainland's telephone imports come from Vietnam and 22.2% from South Korea.

Chart: the main suppliers of textile and clothing products and their raw materials are also countries and regions around China.

Edit / irisz