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The International Monetary Fund this week issued a revised forecast of just 3.3% growth for China this year, in a further signal that Beijing’s ambitious 5.5% target is looking increasingly unattainable. The IMF’s latest forecast in its World Economic Outlook Update, revised down from 4.4%, has set it below the current Reuters consensus expectations of economists, which stands at 4%. It came as little surprise to Fathom Consulting, however, which predicted Chinese growth of just 2.8% for 2022 in our Global Outlook forecast on 8 June – a figure we see no reason to revise. So what is the backdrop to the downbeat growth forecast and what will be the factors in play going forwards?
China’s economy was hit hard by the COVID lockdowns, contracting by 2.6% in Q2 and expanding by just 0.4% over the twelve months to April-June. The latter figure was the second weakest reading on quarterly records beginning in 1992. Activity has recovered from its trough in April, however, as key cities have reopened and the economy has benefited from stimulus. In June all the purchasing manager’s surveys moved above the key 50 mark that separates expansion from contraction, with the NBS and Caixin readings for non-manufacturing and services close to 55. The surveyed unemployment rate has also fallen back in recent months, although it remains quite elevated, particularly in the largest cities.
Beijing stepped up the policy stimulus to support the recovery in activity. A key focus has been fiscal easing, particularly tax and fee cuts for businesses, and increased infrastructure spending. By the end of June, local governments had issued over 90% of their annual quota of special bonds that are largely used to fund infrastructure spending (at comparable points in 2020 and 2021, around 60% and 25% respectively of similar-sized quotas had been issued); and spending of the proceeds should further boost activity over coming months. Media reports suggest that the authorities may even allow local governments to bring forward some of their special bond quota for 2023, which could further boost activity later in the year. There was also signs of policy easing coming through in the Total Social Financing figures, with June’s increase of 5.2tn RMB being easily the strongest on record for that month. Within that, there was a significant rise in bank lending, with some key lending categories showing signs of life: there were large increases in borrowing for long-term corporate loans and to a lesser extent mortgage loans.
Nevertheless, the economy continues to face several major headwinds through the remainder of the year: not least, from Beijing’s insistence on sticking to its ‘Dynamic zero-COVID’ policy. Despite some easing in enforcement measures, the policy is likely to continue to result in strong, unpredictable restrictions in activity as the more transmissive Omicron variant fuels recurrent outbreaks of cases. President Xi is highly unlikely to move away from his signature policy before the National Party Congress, likely in October or November. In addition to the likely negative impact on growth from further lockdowns, the policy will continue to weigh on the confidence of private businesses and households.
Meanwhile, the housing market remains firmly in the doldrums. The volume of housing starts and sales was around a third and a quarter lower respectively in the first half of 2022 compared with twelve months earlier. House prices at a national level have fallen modestly since last autumn, and the proportion of respondents expecting higher prices over the next quarter is close to its lowest on record according to the Urban Depositors Survey. The highly-publicised mortgage boycott by individuals waiting to receive their unfinished properties risks further weakening sentiment towards the sector. Sharply falling revenues from land sales will also reduce the ability of local government to support growth.
Strong exports have been a bright spot for the Chinese economy; exports are currently growing at a much faster rate than imports, resulting in a record monthly trade surplus in June. That said, the external backdrop is likely to become much less favourable in the coming months, with the prospect of recession in key markets. This week’s GDP data suggest the US is already in technical recession, with a relatively modest contraction of economic activity in Q1 and Q2. The euro area is potentially facing a more severe economic downturn.
All in all, despite the gradual recovery in the Chinese economy in recent months, growth is likely to come in significantly below the government’s target this year. The leadership appeared to acknowledge the inevitable in a statement from the Politburo after its meeting on Thursday 28 July, dropping the previous reference to meeting the economic targets in 2022, and suggesting merely that the best possible outcome for the economy should be striven for. This cannot be what President Xi was expecting or hoping for in such an important political year, although he still seems likely to secure an unprecedented third term as leader.
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