• Consumption Trends – Retail sales growth fell sharply in December due to COVID outbreak disruptions, and the ongoing slowdown in household income is also undermining consumption growth. Against the backdrop of continuing COVID outbreaks, labor market weakness, and the property market downturn, our near-term outlook for Chinese consumption remains gloomy. 

• Trade Trends – China’s strong export growth has been more enduring than expected in 2021, but the momentum is likely to slow in 2022 as pandemic-driven demand dynamic for goods versus services abates. Of note, booming exports and the maintenance of a steady production environment in 2021 have made China an even more popular destination for foreign direct investment. .

Implications for Business

Recent policy signals confirm that the central government has strong determination to stabilize economic growth.  It is likely policymakers will lean heavily on the state sector for the needed growth support in 2022. We have seen one RRR cut and two benchmark loan rate cuts in the past two months. The market expects further monetary easing later in 1H 2022 if the recent easing measures fail to revive credit growth. Infrastructure investment growth bounced up in December 2021, signaling, we think, the beginning of an expected surge. To restore buyer and developer confidence, unwinding some of the policy constraints on the housing market seems increasingly possible now. We expect that the official target for 2022 GDP, when revealed at the March NPC, will be set at between 5 to 5.5 percent. Looking forward, economic growth in 2022 will be largely dependent on fixed investment by the state sector: infrastructure development, social housing, and SOE physical plant investment. The financial leverage ratio of the state sector is poised to rise significantly in 2022.