17 Mar 2022
Stronger-than-expected data from China in recent weeks have helped a little to stabilise market sentiment amid omicron resurgences and lockdowns in the country. ANZ Research expects further measures to be used to support economic growth. The market will watch keenly to see the direction China will take.
Both the People’s Bank of China (PBoC) and the State Administration of Foreign Exchange (SAFE) have pledged to increase the relending quota and expand credit to support growth after the release of first-quarter gross domestic product (GDP) data.
“Upside surprises in recent data, including first-quarter GDP, industrial production and fixed-asset investment have not mitigated worries about the continued contraction in retail sales.”
ANZ Research expects other supportive measures to be announced, including proactive fiscal policy, easing of regulations and rapid COVID-19 control.
Should lockdowns in major cities be lifted, China could regain its growth momentum by the end of the second quarter. ANZ Research maintains its GDP growth forecast at 5.0 per cent for 2022.
Upside surprises in recent data, including first-quarter GDP, industrial production and fixed-asset investment, have not mitigated worries about the continued contraction in retail sales. In addition, March’s jobless rate rose to 5.8 per cent, the highest since May 2020.
Households and SMEs have also been impacted by recent lockdowns in several cities as activity came to a halt. These developments have not yet been captured in published data.
But China’s authorities will adhere to their 2022 growth target of about 5.5 per cent and the employment target of creating 11 million jobs. This means policymakers will intensify growth-supportive measures.
Indeed, the PBoC and SAFE issued 23 measures to support growth after the GDP data release including an increase in the relending quota to SMEs and an expansion in credit. More are on the way.
ANZ Research expects China’s GDP to grow 0.4 per cent quarter-on-quarter in the three months to end June. The impact of the omicron outbreak and lockdowns will likely be reflected in the data from April. This is expected to translate into GDP growth of 4.4 per cent in the first half, meaning average sequential growth of 2.0 per cent across the remaining quarters will be required to attain 5.0 per cent annual GDP growth.
China’s economy now faces higher hurdles to achieve the official target of 5.5 per cent growth as an average sequential growth of 2.6 per cent quarter-on-quarter will be needed in the second half.
The timing and pace of activity normalisation is crucial in assessing China’s growth outlook. ANZ Research’s assumption is economic activities will gradually normalise from May onwards.
Pent-up demand in subsequent months could offset previous losses as policy impacts gradually ripple through the economy. However, there will be higher downside risks if activity in major cities normalises later than expected or if infection resurgences are more severe than expected.
That said, local governments have some flexibility in their implementation of the central government’s zero-COVID stance. They will be more inclined to intervene sooner rather than later to rapidly control transmissions. This could reduce uncertainty surrounding China’s pandemic development.
ANZ Research believes the focus of China’s monetary policy is on lowering the liability costs of banks with policy rate adjustment taking a back seat. Rising inflation and ongoing capital outflows will prevent the PBoC from further trimming major policy rates in the near future.
Monetary policy measures preferred by the PBoC, in ANZ Research’s view, include increasing the relending quota and reducing relending rates for specific industries.
Reserve requirement ratio (RRR) cuts are likely only further down the road. Following the 25 basis point cut in April, ANZ Research expects cuts of another 100 basis points through the second half, taking the minimum RRR below the 5 per cent level.
Finally, an adjustment in the deposit rate under the ‘self-discipline’ mechanism is likely. The PBoC has reportedly encouraged small and medium-sized banks to lower the upper bound of their deposit rates by 10 basis points.
These measures will provide some room for Chinese banks to lower their loan prime rates. ANZ Research expects a 5 basis point cut in the following months.
While the market tends to pay more attention to China’s monetary policy, the likelihood of policymakers stepping up their fiscal efforts has also increased. In addition to tax rebates and refunds, there are other possible tools.
One is issuing special Treasury bonds. The omicron outbreaks and lockdowns have dented fiscal revenues. When China was first hit by the pandemic in 2020, the central government issued one trillion yuan of Treasury bonds to fund economic stimulus.
China’s President Xi Jinping has vowed to boost modern infrastructure investment and that will require fiscal and credit support. The authorities can pre-approve 2023’s quota of special local government bonds (SLGB). According to the State Council’s endorsement in 2019, the Ministry of Finance can pre-approve the following year’s issuance quota of SLGBs if required.
The majority of SLGB issuance will have to be completed by mid-year, at a pace much faster than previous years. This leaves room to bring forward next year’s issuance quota in the final quarter.
Finally, adjusting the fiscal deficit for 2022 remains an option for policymakers. This year’s deficit was set before the omicron outbreak and is much lower than the deficit set for the pandemic year in 2020.
The last time China revised its annual fiscal budget was in 1998 when the country was hit by the Asia Financial Crisis. Although a rare practice, this possibility should not be ruled out when the standing committee of National People’s Congress meet in the following months.
As a last resort, China can still stimulate economic activity by easing regulation in various sectors. The cyclical downturns have prompted policymakers to make concessions when implementing structural reforms over the past few months.
For instance, the State Council has dropped energy consumption targets despite earlier carbon neutral commitments. Authorities have also granted the first batch of online gaming licenses in April, after a nine-month long freeze in the tech sector.
The market will also pay close attention to any further relaxation of local-level property policies, especially in top-tier cities. Following gradual relaxation in developers’ funding restraints since last November, demand-side easing has also started to pick up since early 2022.
However, China’s property sector has remained sluggish. This suggests further policy relaxation is needed to restore confidence in the housing market.
Betty Wang is Senior China Economist, Zhaopeng Xing is Senior China Strategist & Raymond Yeung Chief Economist, China at ANZ
This article was originally published on ANZ’s Institutional Insights website
The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.
17 Mar 2022
01 Feb 2022