China - Beijing steps up policy support as drags build
Our annual growth forecast for 2022 (3.7%) almost 2 %-points below Beijing's official growth target. Headwinds from Covid-19 policy, real estate and power shortages constrain post-lockdown rebound. Beijing resumes piecemeal monetary easing, steps up real estate and broader support as expected.
Last month, partly reflecting a GDP contraction in Q2 of -2.6% qoq, we cut our 2022 growth forecast to 3.7% (from 4.2%) – see . The official growth target for this year (5.5%) will remain out of reach. Reflecting payback from the Q2 slump (and with exports outpacing imports), we still expect above-trend qoq growth in 2H-2022. That also assumes the overall lockdown intensity will remain lower than in March/April, despite recurrent virus flare-ups, and additional policy support. Still, China’s rebound will be unbalanced, bumpy and less spectacular than the recovery from the initial Covid-19 shock in 2020, with key headwinds from strict Covid-19 policies and property sector woes remaining, and a slowdown in global growth adding risks.
Post-lockdown rebound constrained by drags from Covid flare-ups, real estate woes and power shortages
PMI and activity data published over recent months do confirm a post-lockdown rebound. That said, disappointing July data illustrate that the strength of this rebound is constrained by ongoing headwinds from pandemic flare-ups and strict Covid-19 policies (characterized by ‘mass testing and mini lockdowns under dynamic clearing’) combined with distress from the property sector. The rebound is again led by the production side, with authorities having prioritized the normalization of production and transport chains above supporting consumption. Still, Covid-19 flare-ups and power shortages (heatwave-related, not policy-induced like last year) have hampered the rebound in industrial production. Retail sales slowed to 2.7% yoy in July (June: 3.1%), with Covid-19 policy leaving its mark on consumer condicence. Property sales are still in the doldrums, with more property developers facing financing problems to finish construction projects (see below). Fixed investment slowed to 5.7% yoy ytd (June: 6.1%), with property investment once more contributing negatively. While the unemployment rate dropped further in July, to a six-month low of 5.4%, youth unemployment rose to a record high of 19.9%.
PBoC resumes piecemeal monetary easing and takes wider measures to safeguard growth and support real estate
As we highlighted in previous publications, property sector woes have continued to spread. The erosion of confidence among home-owners that construction projects will be finished has triggered a boycott of mortgage repayment obligations. The pick-up in credit growth has also stalled due to weak mortgage demand. Recent measures taken are in line with our view that the PBoC would resume piecemeal monetary easing and would step up broader support, including to the property sector. In recent weeks, the PBoC resumed mini cuts of a number of policy rates, with a particular focus on the 5-Year Loan Prime Rate that functions as a benchmark for mortgage rates. Next to the rate cuts, Beijing will offer special loans (CNY 200bn) to developers so that they continue finishing projects. Also, the PBoC is urging state banks to step up lending to the real economy, including to the property sector. In late August, local governments were given more freedom to use city-specific policies to support real estate. The latter measure was one of the 19 elements of a broader CNY 1trn (USD 150bn) stimulus package aimed at supporting investment and consumption and stabilizing the property markets.