China's economy in 2022
- China’s structural economic slowdown has been ongoing, and soon sub-5% growth may be the new normal. China economic growth has slowed rapidly, from 4.9% y/y in Q3:21 to just 4.0% y/y in Q4:21, with every sector losing momentum, merely expanding far below pre-pandemic trends. Headwinds to the property sector led to outright contractions in real estate and construction, but most concerning is sluggish manufacturing (due in large part to electricity shortages), slow wholesale and retail trade (partially due to pandemic interruptions), and struggling transport and storage (which have faced the combined force of these shocks). Now, the highly transmissible Omicron has reached the Mainland, incurring yet further lockdowns.
- Even before Delta and Omicron, policymakers had become increasingly concerned about economic activity. Gradually, the dials of both monetary and fiscal policy have tilted increasingly towards supporting growth. Recently, mounting economic risks impelled the central bank to cut policy rates for the first time since April 2020. This is in stark contrast to elsewhere. Not only has rising inflation already forced many policymakers in emerging market economies to raise rates, but the US Federal Reserve may well speed up monetary tightening. Divergence in policy rates between the US and China, coupled with the ongoing narrowing of growth differentials, implies a CNY on the back foot against the USD in 2022.
- Credit numbers have yet to deliver evidence of a turnaround. Bank loan growth edged down in December to its slowest pace in two decades. Demand for both household and corporate credit has been subdued. However, an acceleration of loan approvals would be difficult without a loosening of requirements. Credit growth should still edge up in the coming months – but we expect only a modest pick-up in lending, which would be unlikely to drive any sharp turnaround in economic growth.
- In 2022, more important than the exact calibration of monetary and fiscal policy, will be the approach to regulation and policy. As in 2021, the trajectory will be owned by the path of both the property sector and infrastructure investment. We also believe that the campaign-style approach to regulation will continue.
- Irrespective of whether or not the government sets an explicit growth target in 2022, aiming for above 5% in 2022 is a reasonable expectation. Unlike in 2021, during which China could comfortably achieve its full-year GDP growth target of above 6%, irrespective of where GDP growth ended the year, permitting policymakers to push ahead with growth-unfriendly polices. This year, even hitting this reduced growth target would require policymakers to offer rather robust economic support measures and increase the country's debt-to-GDP ratio.
- Since 1990, China’s growth has led EM (emerging markets) but its economic growth will soon slip below 5%. Therefore, the pressure on other larger emerging market economies to drive them forward is now magnified. However, almost all the large EM economies are forecast to increase by less than 4% over the next three years. Most are aruguably reliant on China’s growth, and specifically its old growth model/levers, and therefore unprepared to incorporate China’s ongoing structural slowdown and transformation.