January 21, 2022 | 13:16
Can China Engineer an Economic Recovery in '22?
This is the big question facing Beijing as 2021 moves further into the rearview mirror. The need to get the economy back on firmer footing this year is considered critical as the Communist Party is set to hold its 20th National Party Congress in late autumn, an event that will determine whether President Xi Jinping will be able to break the recent leadership succession pattern and secure a third term at the country’s helm. This likely explains why the People’s Bank of China (PBoC) has stepped up its efforts and eased monetary policy in recent days (e.g., one-year loan prime rate was cut 10 bps to 3.7%) after effectively standing pat in the second half of last year.
However, Beijing has a difficult task at hand as the economy has lost a lot of momentum. Though Q4 real GDP beat the market’s expectations, it still grew only 4.0% y/y (vs. 4.9% in Q3). Moreover, higher-frequency data suggest domestic demand has nearly ground to a halt. Retail sales rose a paltry 1.7% y/y in December, while we estimate that fixed asset investment posted a similar rise of 1.6% y/y. Not helping matters is that many of the key factors that have dragged economic activity and overall confidence down since last summer—the regulatory crackdown (e.g., private education and internet/technology), the Evergrande-driven housing downturn, the power crisis and more sporadic COVID outbreaks—are still rumbling in the background.
The good news is that merchandise exports are expected to continue to chug along as global demand for goods remains robust. If anything, it appears that the Middle Kingdom’s role as the world’s factory may expand further given recent investment trends. Fixed asset investment in manufacturing climbed 13.5% in 2021, while utilized foreign direct investment hit a record high. On the flip side, it appears that China is likely to stick with its zero-COVID strategy to ensure that manufacturing activity is not heavily disrupted from the Omicron variant. This will make it difficult to revive consumer spending, especially if caseloads become more widespread.
Such a challenging backdrop means that Beijing will have little choice but to revert back to its old policy playbook, which has been largely abandoned in recent years, and ramp up infrastructure-related fiscal stimulus to provide the economy a bigger, more immediate boost. The recent announcement that the government is planning to expand its high-speed railway network by just over 30% to 50,000 kilometres by 2025 shows that fiscal policy has not been completely forgotten. The reality is that after two decades of breakneck development, the country still has many infrastructure needs (water, power, hospitals, etc.). Monetary policy will also be eased further, especially since headline consumer price inflation remains in check, rising just 1.5% y/y in December. Beyond lowering policy rates and bank reserve requirements, we suspect that the PBoC will rely heavily on moral suasion and direct banks to channel funds to desired sectors, namely housing and small and medium-sized enterprises.
Key Takeaway: The economy is likely to continue to struggle in the next few months, but we expect greater policy support will help stabilize the situation in the second half of the year. As a result, we are maintaining our forecast for real GDP to post growth of around 5.5% in 2022, following last year’s 8.1% bounce-back.