The authorities have promised to step up supportive policy efforts, but with plenty of headwinds remaining, we are sticking for now with our growth forecast of 4.5% in 2022.
Dong Chen and Ling Chen, Pictet Wealth Management.
Activity data out of China for the first two months of the year beat market expectations. Fixed-asset investment and industrial production both improved notably. However, strong growth headwinds remain, especially as the country is fighting the largest wave of covid infections since mid-2020, and there has been little improvement on the property-sector sentiment. In contrast to better-than-expected business activity, credit growth in February came in well below market expectations, mainly dragged down by softness in the property sector.
The recent (16 March) high-level meeting chaired by Vice Premier Liu He sent clear messages about stabilising the economy and addressing other key market concerns.
On macro policy, the meeting pledged to take substantial measures to shore up first-quarter economic growth and mentioned that this would require an “active responses” from monetary policy. Plans were announced to “efficiently deal with risks” and to “explore and roll out plans that facilitate a new development model”. On regulations for large-platform companies (i.e., the internet giants), the meeting said the relevant government agencies would be required to complete the rectification work on these companies as soon as possible and to facilitate their stable and healthy development through transparent regulations.
On ADR delisting risks, the meeting mentioned that policy makers in the US and China were maintaining dialogue and that progress had already achieved towards concrete plans. In addition, China will continue to support Chinese companies’ overseas listings.
These are the clearest indications so far from the Chinese government of its determination to stabilise growth and reinstall confidence into the economy.
Looking ahead, we expect the People’s Bank of China to conduct another round of cuts to banks’ required reserve ratios (RRR) and to cut policy rates in the near term. On the fiscal front, more supportive measures are likely in the area of infrastructure investment and household consumption against the ambitious growth target of 5.5% for 2022 announced at the latest National People’s Congress.
In conclusion, the latest data show some initial improvement in areas like infrastructure investment and industrial production, but strong growth headwinds remain. Given the current deteriorating covid situation and the uncertainties caused by the Russia-Ukraine conflict, especially in terms of surging energy prices, our macro outlook for China remains fairly conservative at this stage. We have decided to keep our full-year GDP growth forecast of 4.5% unchanged for the time being, but we recognise that there could be upside risks on the back of possible additional policy easing and/or improvement in the regulatory environment.
