Economy Watch: China View (May 2022)
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Economy Watch | China

Monthly updates on the state of the economy in China

Economy Watch: China View (May 2022)

May 31, 2022 | China Center Publications

Expect hard economic hit in Q2 from COVID

The worst of the COVID shock may have occurred in April, but stringent mobility controls are far from over. Just as critical, China’s current economic recovery is unlikely to be as strong as the recovery that followed China’s first COVID shock in the 2H 2020.  At that time, China’s real estate sector was still booming, and Chinese exports were surging in response to global COVID-related demand. Both growth drivers are now spent, and real estate has already turned into a drag on the economy.  

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ARTICLE

  • Status of China’s Economic Recovery – Economic activity is dropping sharply amidst ongoing “Zero COVID” lockdowns, with April data showing negative growth in industrial production and a double-digit contraction in retail sales (see TCB commentary on Zero COVID). Despite a steady decline in new COVID cases since mid-April, mobility and logistic controls remained mostly in place by the end of May. While industrial production and construction activity is unlikely to fully recover by June, new policy measures were introduced in May to spur demand for housing and cars. Further easing is expected for the housing market to build confidence among investors and home buyers.

  • Investment Trends –  Fixed Asset Investment growth dropped from 9.3 percent in Q1 to around 2 percent in April. COVID-related uncertainty and the weakening growth outlook are undermining investor sentiment. The benchmark rate cut for long-term loans in May underscores China’s policy priority to guide existing ample liquidity toward household mortgage and business investment. Backed by such policy support, investment is likely to outperform both consumption and exports this year.

  • Consumption Trends – The double-digit contraction in April may indicate a bottom for the year, but we expect only modest growth recovery in the months ahead due to the dual drags of declining household income growth (mostly a function of weak employment growth) and rising consumer inflation (particularly for food) 

  • Trade Trends – Domestic production disruptions due to COVID lockdowns plus weakening external demand are weighing on China’s export growth – April saw export growth drop from 14.7 percent y-o-y in March to 3.9 percent. Global trade growth is expected to weaken substantially this year and may persist into 2023 due to uncertainty about the course of the Ukraine war (see WTO forecast). The recent sharp depreciation of the RMB may heighten capital outflow pressures for financial investors. Nevertheless, TCB’s CEO confidence survey, released this month, suggests that real-economy investors plan to continue investing in China (see The Measure of CEO Confidence™ for China).

Implications for Business

The worst of the COVID shock may have occurred in April, but stringent mobility controls are far from over. Just as critical, China’s current economic recovery is unlikely to be as strong as the recovery that followed China’s first COVID shock in the 2H 2020.  At that time, China’s real estate sector was still booming, and Chinese exports were surging in response to global COVID-related demand. Both growth drivers are now spent, and real estate has already turned into a drag on the economy.   

Given new measures to counter economic shocks, we expect to see a modest rebound in the second half of the year, but it won’t be enough to achieve a “near 5.5 percent growth rate” in 2022, the government’s official target.  In May, we revised our GDP forecast to 4.5 percent, but this adjustment bears downside risk should COVID disruptions continue as per current, in the 2H. Companies should plan for persistent “down market” conditions lasting through year-end.       

 

For access to the full report, please contact our research or membership staff listed on the last page of the downloabable Executive Summary PDF.

 

 

 



AUTHOR

YuanGao

Former Senior Economist, China Center for Economics and Business
The Conference Board


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