When Xinhua released the government work report on 12 March this year with the stated objective to reach “GDP growth of around 5.5 percent” in 2022 and to create as many new urban jobs (11 million) as announced in the 2021 report, this was widely seen as quite a stretch.
First, the natural structural slow-down of an economy that has since the 80s grown for over 30 years at double digit rates and now needs rebalancing towards a less investment-driven growth model is putting downward pressure on growth.
Second, the compounded effect of last year’s regulatory crackdowns in technology, education or real estate sectors, natural disasters, an energy shortage as well as the ongoing pandemic affecting ca. 40% of China’s economy have dealt a heavy blow to the already impacted growth dynamic, with GDP growth in the fourth quarter of 2021 dropping to 4%. The resulting downward trajectories for major growth contributors like retail sales and business investments were clear warning signs of slowdown ahead.
Notwithstanding these downward signals, economic policymakers were convinced that 5.5% would be within reach by early March 2022. At that time, also nobody could fully capture the extent of the impact that both the war in the Ukraine as well as the lengthy lockdowns in up to 45 cities with roughly 370 million people would have on the Chinese economy.
Now, the data available from the first four months of this year reveal how difficult the job for Beijing is going to be for the rest of the year.
In the first quarter (Q1) of 2022, the 4.8% official growth were a positive surprise. It was, however, measured against two rather weak first months in 2021. Plus, most of the painful effect of the lockdowns were only visible in the data towards the end of this period, with March and now April figures showing a clear slowdown in economic activity. The Caixin Composite PMI for instance, an indicator for economic activity, first dropped to 43.9 in March and then further to 37.2 in April, the worst reading since the onset of the pandemic in 2020.
Investments in infrastructure and machinery – in the past contributing up to 50% to GDP – registered a positive +9.3% growth in Q1. Much of this seems to be stimulated front-loading of government induced projects. And while real estate investments have grown by only 0.7% in Q1 with a negative number already in March (-2.4%), sales among large real estate developers have completely collapsed, dropping between 40-50% January to April. Overall, the real estate sector with its up- and downstream services contributes up to 30% of GDP.
Consumer confidence is also badly hit, especially in areas under lockdown. People in these uncertain times rather save their money instead of spending it, letting retail sales – responsible for almost all consumption – drop by -3.5% in March (+3.3 in Q1), with a further drop expected in April and May. Consumer spending in the past has contributed another 33-36% to GDP.
The trend is compounded by weakening exports that after a very robust Q1 with 13.4% growth compared to the same quarter of 2021 have in April only grown by 3.9%. While export numbers in absolute terms are still about 30% higher than in early 2019, inflation in the EU and the US mean that they will likely also not be able to pick up the slack this year. In the past, the trade surplus has also only contributed roughly 3% to GDP.
Government spending – making between 10-15% of GDP – is limited by the government’s desire to keep debt in check, and therefore is not expected to change substantially.
In light of these headwinds, policymakers already in March started taking various measures to boost business confidence, help ailing businesses and stimulate consumption in recent weeks and months. These include delayed pension premiums, unemployment support, tax and fee reductions for businesses, special support for SMEs in the form of loan discounts or fee reductions, the issuance of new special purpose bonds for local governments as well as recently also relaxed restrictions on real estate and tech sectors. On 25 April, the PBoC also reduced the requirements for banks to hold monetary reserves by 25 basis points to support markets with more liquidity.
By mid-May, however, the effect of these rather measured interventions on business sentiment has been limited, unemployment is on the rise and the CSI 300 in late April has dropped to its lowest reading in two years, with the Yuan also weakening, raising fears of further capital outflows.
As a result, several economists have been revising down their 2022 growth forecasts for China. The IMF in April adjusted its projection of now 4.4% already the second time after its initial 5.6% forecast in October – the worst since the 90s, with the exception of 2020.
Whether Xi’s commitment to boost infrastructure construction in late April to fill mentioned gaps in transport, energy and water conservation as well as national security infrastructure will materialize in time to support this year’s growth, with lockdowns in some parts of the country still ongoing, seems doubtful. What further dims the hope of a quick rebound that followed the pandemic in Wuhan in 2020 is that the May 5th Politburo Standing Committee meeting doubled down on the zero-Covid approach, while at the same time leaving out the expression of “achieving maximum effect at minimum costs”, which appeared in the March 17th Politburo Standing Committee meeting. In other words, the top leadership is willing to sacrifice short-term economic performance in return for containment of the current Covid surge.