Further support due

Outlook gloomy, irrespective of actual 2022 growth

• Forward-looking data points imply economic activity deteriorating further in April and May – at the very least – which was not anticipated just weeks ago. Q2:22 looks bleak – worse than the 4.13% y/y currently foreseen by Nowcast. However, much will depend on the extent to which the Chinese leadership supports near-term economic activity. For now, policymakers are targeting 5.5% growth for 2022, primarily through (but not limited to) accelerating infrastructure spending, pausing macroprudential goals in real estate, and supporting manufacturing. Unless Beijing officially lowered its annual growth target, monetary and fiscal policy would need to be far more forceful than was outlined in the Government Work Report (GWR) in March.
• As large swathes of China undergo some degree of lockdown in response to rising Covid-19 cases, the economy is creaking under the pressure, beyond the direct consequences of the ongoing closure of Shanghai – the financial hub – and Beijing. Already, around 50 cities are in some form of lockdown, affecting 343 million people. This is battering consumption and services, business confidence and exacerbating supply-chain snarls stoking costs. The government however at this juncture remains committed to a zero-Covid policy, with the threat of further lockdowns ever-present.
• 2022 was always going to be very different from last year, even before the surge of Covid cases since March, the worst outbreak in China since February 2020. Last year, China could comfortably achieve its full-year GDP growth target of above 6%, whilst policymakers pushed forward growth-unfriendly polices – such as the crackdown on the tech sector and/or real estate developers. But, this year, policy had to have a strong pro-growth tilt, and this increasingly pro-growth policy focus will come at the expense of medium-term stability.
• Before this latest outbreak, policy aimed to “do just enough” to prevent big economic data misses. Now, monetary and fiscal policy will have to be far more proactive. For the former, there are limits to how much more accommodative monetary policy can reasonably be. Therefore, most of the work will come from fiscal policy. To this end, Beijing has called for urgency from local governments in breaking ground on key construction projects, accelerating the issuance of special-purpose bonds, increasing credit support, and easing approvals. It will take months yet to get this money, and support, into the economy – deferring any significant economic growth boost to June. This would also be contingent on the effectiveness of fiscal transfers, and the degree to which traditional levers are embraced in coming months, and, most importantly, Covid outcomes in cities across the country.
• The rebalancing and deleveraging plight will likely tread water, with genuine transformation eschewed; economic growth will therefore likely come at the continued expense of a suppressed consumption base, undermining policy buffers for the economy, and eroding the resilience of the financial system. Growth of 5.5% in 2022 is still plausible in 2022, but its composition will be unappealing. And, looking ahead, the growth rate would now have to slow even more sharply, sooner or later.