China - Growth forecast down for 2022, up for 2023

China Macro: Revising our growth forecasts

Last week, we commented on China’s Q2 GDP numbers (see here), and announced we would review our growth forecasts. The Q2 GDP numbers came in even weaker than expected, following the broadening of lockdowns in March and April and the subsequent slump in economic activity, with its nadir in April. Real GDP contracted by 2.6% qoq s.a. in Q2, with annual growth dropping to 0.4% yoy, the lowest pace since the initial Covid-19 shock in Q1-2020. Annual growth in the first half of the year dropped to 2.5% yoy (Q1: 4.8%), putting Beijing’s official growth target of 5.5% out of reach. We added that, despite these Q2 GDP disappointments, we still expect growth momentum to pick-up significantly in the second half of the year, which was also illustrated by the PMI and activity data for June. This assumes the nationwide lockdown intensity will remain significantly lower than in March/April, and targeted policy easing and a relaxation of macroprudential regulations (including for real estate) will continue. That said, headwinds persist in the form of virus flare-ups combined with strict Covid-19 policies, problems in the real estate sector, and the significant slowdown in China’s main export markets. All in all, we have cut our annual growth forecast for 2022 further, to 3.7% (from 4.2%). Meanwhile, we have raised our 2023 growth forecast to 5.6% (from 5.2%), mainly reflecting the weaker base from 2022 and spillovers from the growth re-acceleration in the second half of 2022.

Loan Prime Rates on hold, as expected

Meanwhile, China’s main lending rates were left on hold today, in line with consensus expectations including ours. The fact that the PBoC left its 1-year MLF rate unchanged at 2.85% last week already signalled that the 1-year and 5-year Loan Prime Rates (LPRs) would be maintained at 3.70% and 4.45%, respectively. The authorities have become more cautious with further piecemeal monetary easing over the past months, against the background of aggressive rate hikes in the US and other developed economies. We still see room for some piecemeal monetary easing in the form of mini rate cuts and RRR cuts in the course of this year, but we expect policy makers to wait until the dust from further Fed rate hikes is settled. As we mentioned last week, China’s credit cycle has started turning, driven by fiscal stimulus, but for the credit rebound to gain further strength and to last longer, a firming of private credit demand is needed, with mortgage demand being a central pillar. The 5-year LPR is a benchmark for mortgage rates, so after the 25bp cut in May a further measured reduction over time is likely to bring some relief to the real estate market. Distress among property developers and related parts of the financial sector has continued to spread. The lockdown slump has delayed the recovery of property sales. Moreover, a boycott of some homebuyers to stop paying mortgage obligations for unfinished projects (which has so far affected over 300 projects in more than 90 cities – although still relatively small in terms of banks’ overall mortgage portfolios) is now being followed by the refusal of some suppliers to real estate developers to repay bank loans. All in all, a more forceful approach to support the real estate sector looks essential to mitigate systemic risks and safeguard growth.