China - Pandemic and Ukraine headwinds threaten the growth target

Activity data for January-February came in much stronger than expected, illustrating that piecemeal easing has started to filter through. Still, drags are intensifying: the spread of Omicron is causing a widening of lockdowns, while the Ukraine conflict will weigh on global growth and adds to inflationary pressures and capital outflows. We expect ongoing easing measures and an acceleration in credit growth, but Beijing’s growth target for 2022 of 5.5% – as announced during the NPC in early March – may prove too ambitious. All in all, we have changed our quarterly growth profile a bit and this has resulted in marginal changes in our annual growth forecasts for 2022 (down from 5.1% to 5.0%) and 2023 (up from 5.3% to 5.4%)

Lockdowns broaden, with the central government prioritizing covid containment as Omicron spreads

The highly contagious Omicron variant has led to more severe outbreaks, with daily cases (although still low from an inter-national perspective) much higher than during the initial and subsequent outbreaks. Hence, Omicron is hampering the shift in strategy from a centralised ‘zero cases’ approach to a decentralised ‘dynamic clearing’, with president Xi and other representatives of the central government once more stating the importance of pandemic containment. In recent weeks, local authorities have stepped up lockdown measures, with around 70 cities (incl. large ones such as Shanghai and Shenzhen) with a combined GDP share of ±40% having been or still in some form of lockdown. Although these lockdowns differ in terms of severity and will likely not last as long as the initial lockdowns, economic activity is already being affected (illustrated by a drop in for instance traffic movements). This is adding to supply disruptions (in line with our expectation that Omicron would delay the normalisation of supply chains), even though local governments over time have generally become more successful in safeguarding key factories and ports from the effects of tighter restrictions.

Although the Ukraine crisis adds to inflationary pressures, we expect piecemeal easing to continue

Inflationary pressures abated recently, but the commodity spikes following the Ukraine conflict will likely lead to a delay in the further easing of pipeline pressures. With CPI inflation remaining well below target, we expect further piecemeal policy stimulus and a cautious relaxation of macroprudential regulation (including for real estate). We expect Beijing to tolerate an acceleration in credit growth, as stability is key for the authorities in a politically important year. That also explains recent measures taken to stem the rout in China’s equity markets. The biggest risk to the outlook stems from a potential escalation of US-China tensions, should the US judge China is going too far in supporting Russia. At the moment, our base case does not include a US/western imposition of severe sanctions against China (such as higher tariffs). China is carefully balancing its external relations given the importance of the US/west as an export destination (see also Will Beijing help Moscow?), while we think the US would want to avoid additional inflationary pressures stemming from such measures.