Dong Chen & Ling Chen, Pictet Wealth Management.
Our 4.5% GDP growth forecast for 2022 remains unchanged for now but may be subject to upside revision in view of policy support.
Chinese GDP in Q4 rebounded on the back of a solid recovery in industrial activities as supply-side constraints eased, helping the Chinese economy expand by 8.1% in 2021 as a whole, well above market expectations. Despite the rebound, strong headwinds to growth remain, including the deceleration in the property sector while successive covid outbreaks, while ovid-related restrictions have further constrained consumer demand. To stabilise the economy, the authorities recently stepped up policy support, especially on the monetary front.
Looking forward, we expect to see further policy support from the government and the central bank to stabilise the economy. Unlike many advanced economies Chinese consumers’ purchasing power was not protected by government subsidies during the pandemic. As a result, consumer inflation in China has been quite mild so far, with the consumer price index coming in at only 1.5% y-o-y in December, well below the government’s target of 3%. Industrial inflation (as measured by producer price index) was much stronger (10.3% y-o-y in December), but we believe it likely has peaked and may continue to decline going forward.
This fairly benign inflation environment will allow the central bank to ease further. We expect the People’s Bank of China to cut the reserve requirement ratio for commercial banks one more time by 50bps, possibly in Q1, and it may cut the policy rate further in the first half of this year. Together with potentially stronger government bond issuance, this will likely boost China’s currently very low credit growth. After bottoming out in Q4 2021, we now reckon China’s credit impulse (on a 12-month change basis) may turn positive by mid-2022.
While the outlook for policy easing is encouraging, this alone may not be sufficient to fully offset other sources of downward pressure on the economy, in our view. In particular, the current credit crisis in the property sector is a direct consequence of the regulatory changes that forced some developers into deleveraging. To stabilise the property sector and to turn around the bearish sentiment among home buyers and market participants, further adjustments in property regulations are probably required. To this end, some positive developments are in the air (for example, the rumoured relaxation of developers’ escrow account rules), but uncertainties remain high. Hence, for the moment, we have decided to keep our full-year GDP forecast for China unchanged at 4.5%, but recognise that it may be subject to some upside risk.
