BOFA, ANZ, China Beige Book on Covid, slowing growth
China’s economy is “struggling” at the moment, but it’s “not in big trouble”, according to Derek Scissors, chief economist at research firm China Beige Book.
“We’re not looking at an outright contraction like China suffered in 2020,” Scissors told CNBC’s “Squawk Box Asia” on Tuesday. He was referring to how China’s economy contracted 6.8% year-on-year in the first quarter of 2020 as the country battled Covid-19.
On Monday, China recorded better-than-expected GDP growth for the first quarter of 2022, although retail sales in March fell amid the mainland’s ongoing Covid shutdowns.
“China’s economy is in trouble but it’s…not in big trouble,” Scissors said, adding that Beijing is likely prioritizing public health at the moment.
“What China has seen in Hong Kong, with Hong Kong doing very well against Covid until 2022, and then Hong Kong’s elderly population being affected, that’s much more important to them,” he said. declared. “From China’s perspective, the economy is not great but it is tolerable and a rural Covid wave would be intolerable.”
Divided over China’s outlook
Analysts are divided on the outlook for China’s economy as Beijing continues to pursue a strict zero-Covid strategy that has seen mass lockdowns imposed on the discovery of infections.
This is in stark contrast to the approach taken by many other countries, which have largely eased restrictions and shifted to a “living with Covid” strategy.
China’s economy is facing “pretty serious headwinds” in the current quarter, according to ANZ’s Richard Yetsenga, who said the continent continues to struggle with its most severe wave of Covid since the initial outbreak. in 2020.
But once that is sorted, China’s economy should return to “reasonable” health, said the chief economist and head of research at the Australian bank.
“There have already been signs that the government is aware of the risks here, there has been more discussion about political support,” Yetsenga said.
On Wednesday, China kept its benchmark lending rate unchanged, with the one-year prime lending rate and five-year LPR remaining at 3.7% and 4.6%, respectively. The majority of traders and analysts polled in a Reuters poll had expected the prime lending rate to drop this month.
The People’s Bank of China announced on Monday that it will increase financial support for industries, businesses and people affected by the pandemic.
It came after China’s central bank unexpectedly kept the key interest rate stable, despite expectations of further stimulus. On the same day, the PBOC also announced that there would be a reduction in the reserve requirement ratio on April 25 – the amount of funds banks must hold in reserve.
Still, Bank of America economists cut their forecast for China’s GDP growth in 2022 from 4.8% to 4.2%. Officially, Beijing has set a GDP growth target of around 5.5% for 2022.
“We fear 2022 will be even more challenging than 2020 for three reasons,” said Winnie Wu, China equity strategist at Bank of America Securities.
First, the current lockdowns are widespread across the mainland – unlike 2020, when restrictions were concentrated in one province, Wu said. This has led to “large-scale disruptions” in transport and logistics.
Then the continued risk of shutdowns as the world enters its third year of Covid has dampened consumers’ willingness to spend offline, she added. Uncertainty around the timing and duration of the next lockdown has also started to undermine longer-term business confidence.
Finally, China’s export growth could suffer as supply chains outside the country normalize as other countries reopen. Before the pandemic, countries like India and Vietnam had benefited from setting up businesses there amid trade tensions between the United States and China.
“Supply chain offshoring, once the trend starts, it will be quite difficult to reverse it,” Wu said.