Chinese economy, possible stabilization in the second half of 2022 «LMF Lamiafinanza

In China, GDP for the first quarter of 2022 exceeded expectations, coming in at 4.8% y/y compared to 4.4% expected (previously: 4.0%). Activity was supported by the secondary sector (6.0%), while the tertiary sector slowed slightly (4.0% yoy).

However, the second quarter of this year is expected to be weak, due to the closing of Shanghai in April and May. We expect growth in the second quarter to be -1.0% y/y, driven by the consumption contraction and very weak manufacturing activity.

According to our base scenario, economic activity will stabilize and could reach 5% y/y in the second quarter. However, the official growth target of 5.5% seems out of reach in the absence of more political support in the short term, but it remains a political target.

We keep our 2022 GDP growth forecast unchanged at 3.7% YoY. GDP growth will stabilize again in 2023, reaching 4.5%, thanks to additional policy measures adopted in the second half of 2022, which will also provide support in 2023. And some upside risks are evident if China continues with more consistent stimulus.

A targeted approach to support weak sectors and stabilize growth by returning it to “normal” levels.

On May 23, China’s State Council introduced a 33-point support plan. The plan includes more than 140 billion renminbi (21 billion U.S. dollars) in additional tax rebates, which will bring tax rebates to 2.64 trillion yuan in 2022 (2.3% of GDP). The plan will also allow small and medium-sized businesses to defer Social Security and insurance payments until the end of 2022.

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The goal is to give priority to emergency loans to the aviation sector and to promote the development of high-speed rail. All local government bond shares must be used in full by August. Priority for new infrastructures such as 5G networks, data storage, etc…

The government will expand the unemployment insurance program to include more companies to retain employees. The People’s Bank of China (PBOC) will double its lending to SMEs. Banks will defer principal and interest for small and medium-sized businesses and personal loans or mortgages for people in financial difficulty.

The plan lacks measures to stimulate consumption, even though support for small and medium-sized businesses accounts for 80% of employment in China. In particular, a 60 billion renminbi (9 billion US dollars) tax stimulus was introduced for passenger car sales, which fell 33.3% in April. The easing of monetary policy was gradual. On April 1, the People’s Bank of China (PBOC) lowered the required reserve ratio by injecting about 530 billion yuan ($83.2 billion) of long-term liquidity.

China’s central bank refrained from lowering the one-year loan prime rate in 2022, defying expectations. The reason for this delay is due to two factors: 1) the People’s Bank of China (PBOC) fears that outflows will worsen while monetary policy divergence with the US widens; and 2) lower rates will do little to stimulate real activity while some lockdown measures remain in place.

In the future, the People’s Bank of China (PBOC) is likely to stimulate aggregate demand through faster growth in M2 and credit. We cannot rule out the possibility of an additional 10bp rate cut in the third quarter of 2022 and 50-75bp cuts in the required reserve ratio.

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President Biden is expected to cut some tariffs on imports of Chinese goods. So far, the decision has been conditioned on conflicting political goals: tackling inflation and maintaining economic pressure on Beijing. Tariffs on Chinese imports have not increased US exports to China. China’s trade surplus and US trade deficit have increased since 2019. Nor have they accelerated supply chain transfers from China (but a zero-Covid policy can).

Going forward, we expect Biden to shift the focus of foreign policy to Asia. The goal will be to contain China’s influence in the region. This will be achieved through a combination of diplomatic and economic means.

The United States is pushing several multilateral initiatives, such as the Indo-Pacific Economic Agreement and the Quartet Security Dialogue. In addition, the United States intends to target certain companies in the Chinese military sector, preventing them from accessing US financial and technology markets.

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