Revising down our forecast for Chinese growth

A sharp economic slowdown has lately prompted the Chinese authorities to announce more policy support, but their insistence on zero covid will likely limit the effectiveness of stimulus measures.

The Chinese economy plunged in April, with consumption, investment and exports all decelerating sharply as a result of stringent zero-covid policies. In response, the authorities have been stepping up policy support. For example, the People’s Bank of China (PBoC) introduced measures to support housing sales, by cutting rates on mortgage loans. But we think the impact on the overall housing market could be limited. The property sector’s current woes mainly stem from the acute liquidity problems and a series of bond defaults by some highly indebted. On top of that, the sector has been hurt by prolonged covid restrictions. Modest rate cuts are unlikely to lead to a strong rebound in housing sales, in our view.

On the fiscal front, the front-loading of government bond issuance has clearly supported infrastructure investment since the beginning of this year. However, momentum was broken in April by mobility restrictions and workplace closures, with investment growth dropping. The slump in land sale revenues collected by local governments will likely further constrain infrastructure investment going forward. Finally, while the Communist Party’s Politburo at its April meeting promised to “promote healthy development of internet platforms”, suggesting an easing of the regulatory crackdown on the tech sector, we are still awaiting policy follow-through.

In conclusion, while there have been some positive developments in terms of policy support recently, the modest scope of the policy stimulus announced so far could mean their impact is limited. More importantly, we have not seen any concrete evidence that the Chinese government is going to reverse its zero-covid policy in the near term, with the possibility of repeated lockdowns given the highly transmissible nature of the Omicron variant. Hence, although we expect some sequential improvement in the economy in May, China’s recovery will likely be slow and limited. Consequently, we remain cautious on Chinese growth and have decided to lower our Chinese GDP growth forecast for 2022 to 4.0% from 4.5% previously.