China’s economy in the year of the tiger
By Zhennan Li
For China, the coming year is of particular political and economic significance. From the Winter Olympics in February to the 20th National Congress of the Communist Party of China, scheduled for the fourth quarter, “the world”, as President Xi Jinping noted, “is turning its eyes to China. This means that China’s financial, environmental and economic policy aspirations, which have been complicated by the pandemic, will come under scrutiny. This is what we see when we look into the eye of the tiger.
Zero-COVID policy comes face to face with Omicron
Since mid-December, a spike in COVID-19 cases in China has raised fears that another coronavirus surge could disrupt the country’s economy, with ripple effects around the world. Although the current outbreak in China pales in comparison to outbreaks in the US and UK, mass testing is underway and affected districts are on lockdown under China’s zero COVID policy. Since its introduction in 2020, this policy has effectively limited the size and duration of outbreaks and helped contain the spread of the virus, including the importation of omicron. Still, the rush of Lunar New Year travel – traditionally the world’s largest annual human migration – and the Beijing Winter Olympics can pose challenges. To make sense of the implications for China’s economy, we compared China’s coronavirus outbreaks to indicators of economic activity since the start of the pandemic. The surges in winter 2020 and summer 2021 weighed heavily on activity, particularly in the services sector (Display). But more recently, the impact has been less, although the number of cases is comparable. Why?
COVID-19 spikes less disrupt economic activity
Vaccines may be one reason. With vaccination rates approaching 90%, compared to 60% in July, household risk aversion could decrease. Additionally, with high vaccination rates and increased experience with the pandemic, local governments may have been able to deploy less drastic measures to contain outbreaks, thereby reducing disruptions to consumption. That said, the current coronavirus outbreak could weigh on consumption in the near term and poses a potential downside risk to the Chinese economy. But we don’t expect the government to initiate a nationwide lockdown as we saw in early 2020, leading us to believe the impact will be manageable.
Where there is a will, there is a way: don’t underestimate Beijing
Moreover, Beijing has sent a clear message: stable growth is essential in 2022. This means that policymakers will increase public investment to support growth and stabilize the economy, as a countermeasure to pressures on the decline of the pandemic.
We cannot stress this enough: we believe it is a mistake to assume that Beijing has reduced its emphasis on GDP growth in its new policy paradigm. As China’s policy paradigm shifted from growth as a single objective to multiple objectives, including financial stability and the environment, stable growth remains essential.
Thus, market participants may be underestimating Beijing’s resolve to keep the Chinese economy on track, leading many observers to predict that China’s GDP growth will be well below potential in 2022. . We do not agree. Our own forecast is for 5.3% growth, with headline inflation slightly higher, but still subdued.
In other words, we expect a Goldilocks economy. But that doesn’t mean our expectations are based on a fairy tale. Beijing has demonstrated in recent years that it has the ability to achieve faster or slower growth, as policymakers desire. And they have no reason to want growth running hot or below potential today.
While growth targets may become more flexible in coming years, healthy growth remains essential to China’s common prosperity plan. Higher per capita income is one of two prerequisites (the other being reduced income inequality) for achieving common prosperity. As a result, President Xi has set a goal of doubling incomes by 2035. And comfortable GDP growth – in the range of 5.0% to 5.5%, on average, during the period of 14th Five-Year Plan – allows revenue to grow. All of this makes growth below 5.0% in 2022 highly unlikely.
Our growth prospects for 2022 depend on three groups of factors:
1) Export dynamics and domestic organic drivers, such as private investment and household consumption. A slower-than-expected recovery in these areas represents the greatest downside risk to our outlook. Moderating global growth could limit export momentum in 2022, and companies may not have much incentive to significantly increase private investment, given weak growth in industrial demand. In addition, the current coronavirus outbreak makes it less likely that the household savings rate (Display) will normalize in 2022, a prerequisite for consumption growth to return to pre-pandemic trends.
Household consumption seems to be picking up
2) Political shocks. Recently, government actions related to Beijing’s financial stability and environmental policy goals have constrained the real estate and manufacturing sectors. Although we have seen some early signs of stabilization in home sales, we expect the real estate sector to remain weak in 2022. Fortunately, the contribution of housing to growth has been structurally weaker in recent years, which has reduced the need a strong rebound in the real estate sector. More importantly, if the balancing of central government policy objectives has unintended short-term effects on Chinese growth, Beijing will likely calibrate the recovery of these sectors to the overall policy balance (as it has done these months), rather than sticking to one goal while sacrificing another. In a year where stable growth has taken on particular importance, the government will be cautious about implementing policies that have contractionary effects.
3) room for manoeuvre, especially on fiscal policy in the broad sense, which is China’s greatest policy lever.
Initiate a policy to ensure the stability of growth
To promote stable growth in 2022, we expect Beijing to deploy broad fiscal policy support, accompanied by supportive monetary policy and stability-oriented housing policy. Here’s how we see it playing out.
For starters, we expect the pace of public investment to pick up quickly and early in the year. Already, the central government has allocated a 1.46 trillion yuan ($229.2 billion) share of the 2022 quota for the issuance of local government special bonds – a major source of funding for public investment – to provincial governments to reinvigorate spending on ambitious infrastructure projects.
Such an expansionary fiscal policy requires supportive monetary policy. This includes robust credit growth and moderate policy rates. Following its likely one-off cut on January 17, we expect the People’s Bank of China (PBOC) to keep policy rates unchanged for the rest of the year at moderately low levels to anchor borrowing costs in the real economy.
(In the transition to a rate-based monetary policy framework, policy rates have become essential for assessing the stance of monetary policy in China. The role of policy rates as anchors for market rates has strengthened, as has the transmission of key rates to bank lending rates.)
We expect credit growth to remain strong, roughly in line with nominal GDP growth, an intermediate target for the PBOC. To this end, the central bank can avail itself of several structural monetary policy tools to support small and medium enterprises, manufacturing upgrades and decarbonization. Overall, we expect the debt-to-GDP ratio to increase in 2022 at a rate comparable to the three years before the pandemic.
In our view, housing policy in 2022 will focus on stabilizing, not reviving, the sector. This indicates a stabilization in the volume of mortgage loans (Display) to meet reasonable housing demand and the resumption of bank lending to developers.
China’s mortgage lending volume has stabilized recently
In recent years, the Chinese government has adopted a two-track approach to housing regulations: a combination of short-term regulations to reduce the housing bubble and maintain price stability, and the establishment of long-term mechanisms. such as the development of a rental market, reform of the system, reform of the tax system, property tax and prudent housing finance policies. The goal is a healthy and less speculative housing sector.
We see the National Housing Policy continuing in this direction, which makes a broad and meaningful easing unlikely. However, some lower-tier cities that have seen falling housing prices may change their policy at the local level. This should release pent-up demand from first-time home buyers (as well as those buying second homes to improve their living conditions), prevent a housing market crash, and reduce the slowdown in China’s overall GDP growth over the past of the Year of the Tiger.
The opinions expressed herein do not constitute research, investment advice or trading recommendations and do not necessarily represent the opinions of all of AB’s portfolio management teams. Views are subject to change over time.
Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.