China’s economy in 2021 saw a higher growth rate on a low-base in 2020, with the general market expecting economic growth of around 7%-8%, and there was no issue for it in exceeding the “6% and above” target for the whole year. However, market institutions are generally not optimistic about the prospects for China’s economic growth, with the World Bank predicting in its latest report that China’s economy will grow by 8% in 2021 and slow to 5.1% in 2022. Previously, the Central Economic Work Conference gave an assessment of overall situation as “shrinking demand, supply shock and weaker expectations”, which, in the view of researchers at ANBOUND, means that the overall economic growth situation is not optimistic. For the fourth quarter of 2021 and the first half of 2022, China may have to prepare for a sustained downturn in economic growth.
For the fourth quarter of 2021, on the one hand, although the recurrence of the COVID-19 outbreak was deemed controlled, the sustained impact on economic activities cannot be ignored. On the other hand, some real estate companies continued to default on their debts, and the sharp contraction of China’s domestic real estate market had a serious impact on the economy in the quarter. At the same time, under the influence of the dual-carbon goal, energy supply bottlenecks, fluctuations in commodity prices and distortions in the global supply chain all had a negative impact on economic activity. Despite the boom in exports and the rapid recovery of industry, China’s domestic consumption has never recovered from the impact of the pandemic. In November 2021, the two-year average growth rate of total retail sales of consumer goods was only 4.4%, and after deducting the price factor, the actual year-on-year growth was only 0.5%. The same goes for investment. From January to November, the country’s fixed asset investment increased by 5.2% year-on-year, and the growth rate continued to decline. As can be seen from the latest financial data, credit and social financing grew less than expected in December, which means that economic growth would continue to decline in the fourth quarter of 2021. The market had expected that the economic growth rate in the fourth quarter would be below 4%, which would continue to decline from the 4.9% growth rate in the third quarter.
What is even more worrying is that this continued downward trend in growth may continue in the first quarter of 2022. Of course, economic growth in the first quarter of 2022 is still facing the high base of 2021 from last year Therefore, even if the scale of the economy continues to expand this year, it is difficult for economic growth figures to perform better. In addition, the main factor effecting the economy in the short term is the recurrence of the pandemic. With the outbreak of the Omicron variant, the COVID-19 has continued to spread. The outbreak in Xi’-an is not over yet, and new cases are emerging in Henan, Tianjin, Shenzhen and other places. Under the strict pandemic prevention and control policy, this means that the impact of COVID-19 in the first quarter of this year would be huge. With the Lunar New Year, a peak season for consumption approaching, many localities have proposed to celebrate the festival at home, which is bound to have a further impact on the tourism, hotel, catering, culture, and other service industries. In addition, although the Winter Olympic Games will be held in Beijing in the first quarter of this year, the corresponding pandemic prevention measures will be more stringent, which will not only be difficult to bring about the “Olympic effect”, but also cause more restrictions on economic activities in relevant regions and become a negative factor affecting economic growth.
Since the fourth quarter of 2021, China has begun to loosen its policies on the real estate market, but institutions such as JP Morgan and Goldman Sachs all expect that in the new year, especially in the first quarter of 2022, the Chinese real estate market will maintain an inertial downward trend despite expected changed. We also believe that the China’s real estate market will continue to “bottom out” in the process of clearing out. With real estate having significant impact on China’s economy, a slowdown in the real estate market will put pressure on the new year.
Some market institutions expect China’s economy to face more growth pressure in 2022. UBS economist Wang Tao said the baseline forecast for China’s economic growth in 2022 is above 5%, but a pessimistic scenario could see growth fall to 4% if strict pandemic prevention and control policies continue for longer than expected, and possibly a larger-than-expected decline in real estate activity. According to Lu Ting, economist at Nomura Securities, under the continued pandemic control measures, the retail and service industries will be severely affected again, and the total retail sales of consumer goods excluding price factors may show negative year-on-year growth. He pointed out that the market’s general forecast for China’s economic growth of 4.2% in the first quarter of 2022 and 5.2% for the full year is probably too optimistic. Therefore, Nomura maintains its forecast for China’s economy to grow by 2.9% year-on-year in the first quarter of 2022 and 4.3% for the whole year, especially in the first and second quarters, which may face more downside risks.
On a quarterly basis, the trend of economic growth this year is likely to be “low in the beginning of the year, and high at the end of the year”. On the one hand, with the strengthening of financial support, the supporting effect of infrastructure investment on the economy will gradually be reflected; on the other hand, the real estate market is expected to improve in the second half of the year. If the COVID-19 situation can be controlled in the first quarter, it may enable the overall economy to achieve a “soft landing” in the first or second quarter. However, it is worrisome that it the trend of continued slowing economic growth cannot be reversed in the first half of 2022 and economic growth continues to decline, the situation facing China’s economy will become more severe after the international environment changes and the Federal Reserve tightens monetary policy.
Looking at inflation and monetary supply data, both the demand and supply factors are affecting China’s economy. Not only COVID-19 will continue to restrain the increase in consumer demand in the short term, on the supply side, some long-term structural problems still need to be resolved. On the one hand, the impact of continuous fluctuations in energy and commodity prices caused by distortions in the global supply chains on production enterprises will continue, on the other hand, the problem of oversupply in some domestic areas has not been completely reversed. If economic growth continues to decline, the accumulation of long-term problems is likely to lead to concentrated outbreaks of various risk factors, which risks “derailing” the economy.
Based on the current situation, ANBOUND’s researchers believe that the trend of continued slowdown in economic growth should be taken seriously. On the one hand, the pandemic prevention policy should be adjusted in time with the changes of the situation, so as to achieve “precise regulation”, reduce the damage to economic operation, and promote the recovery of the service sector. On the other hand, macroeconomic policies need to continue to increase easing and stimulus to improve the overall economic and monetary environment, reflecting the support and stimulus for economic growth. In particular, we have repeatedly cautioned that China should seize opportunities during the window for monetary policy adjustment. Currently, the country’s economy is facing a combination of long-term structural and short-term demand-side issues, where both of these issues will influence each other, and neither of which is optimistic for the economic growth. Therefore, as emphasized by the Central Economic Work Conference, macro and micro policies need to play a synergistic role, avoid mutual constraints, and affect the overall situation of stable growth.
Final analysis conclusion
In the light of the current situation, the trend of China’s economic growth continues to slow down this year. This will require further macro policy adjustments and various micro policies to increase policy support for stabilizing growth, so as to enable China to achieve a “soft landing” in the first half of the year, otherwise the country could very well face unpredictable risks.