China’s GDP expanded 4.8% y/y in 2022 Q1, exceeding our forecast of 4.3%, despite monthly economic data waning due to the impacts of the lockdowns. We expect the economic data to deteriorate further in April as the prolonged lockdown in Shanghai and other cities disrupt the supply chain and factory activities. Shanghai’s 21 relief measures to aid the impacted businesses and the PBoC’s latest move to cut reserve requirement ratio offered some support amid the current outbreak. With the downward pressures likely to persist, more supportive policies are likely in the pipeline.
China’s GDP grew 4.8% in 2022 Q1 despite lockdowns
China’s real GDP rose 4.8% y/y in 2022 Q1, up from 4.0% in 2021 Q4. The figure mainly reflected the rebound seen in January-February data as front-loaded fiscal spending kickstarted infrastructure investment. Increasing growth in investment which accounted for 27% of Q1 GDP growth, will be the main economic driver in 2022 Q2 as consumer activities are expected to weaken amid the Omicron lockdowns (see Figure 1, below).
CEIC’s high-frequency economic activity index shows that economic activity has weakened since the lockdown in Shenzhen. Although Shenzhen reopened after a week of lockdown, the prolonged lockdown in Shanghai disrupted the domestic trucking services and led to port congestion. Moreover, even cities with a low number of Covid-19 cases have adopted stricter containment measures in order to prevent another Shanghai-style Covid-19 outbreak, worsening the existing logistical and supply chain issues.
While the central government attempted to resolve some of the logistical problems, containing the Covid-19 outbreaks remains their top priority. That means some level of disruption will persist until these outbreaks are under control. This will be particularly harmful to online and retail sales, as they face combined logistical and customer income shocks (see Figure 2, below).
Key economic indicators took a U-turn in March
Fixed-asset investment (FAI) decelerated to 6.7% y/y growth in March from 12.2% in Jan-Feb. Industrial production cooled to 6.5% y/y in March from 7.5% in Jan-Feb. As expected, retail sales dropped by 3.5% y/y in March after a surprising 6.7% gain in Jan-Feb. Exports grew by 14.5% y/y in March from 6.1% in Jan-Feb and imports shrank unexpectedly by 0.6% in March from 11.9% in Jan-Feb (see Figure 3, below). However, the worse is yet to come, with the internal and external economic environment worsening since the lockdown in Shanghai.
FAI in infrastructure is the only bright spot
Nevertheless, FAI in infrastructure remained robust, as Chinese authorities front-loaded fiscal spending to instigate growth: it grew by 8.8% y/y in March, up from 8.1% y/y in Jan-Feb. Looking more closely, traditional infrastructure projects such as transport and utility contributed the most to the growth (see Figure 4, below).
We expect FAI in infrastructure to achieve 6–8% growth mainly in 2022 as local governments were asked to utilise all the special purpose bond quota (RMB3.65 tn) by September and quickly deploy infrastructure projects by 2022 Q3.
Closed-loop production systems are not sustainable
Industrial production (IP) remained relatively resilient, with annual growth dropping to 6.5% in March from 7.5% in Jan–Feb. Production in the manufacturing sector declined from 7.3% y/y growth in Jan–Feb to 4.4% y/y in March. This reflected the implementation of ‘closed-loop’ systems in March, with factories continuing operations while their staff works, lives, and stays within restricted areas. The strategy is part of efforts by officials and companies to balance disparate goals: zero Covid-19 cases and continued factory production.
Factories operating with closed-loop systems may still be forced to shut down due to part shortages and logistical challenges. Automakers located in Shanghai, one of the largest automotive production hubs, were heavily impacted by the supply chain disruption. Therefore, the auto production has collapsed to -18.0% in March from 20.6% jump in Jan–Feb. Meanwhile, construction-related production such as cement and steel production improved a bit as the infrastructure projects are deployed and local governments have relaxed measures to support the property market (see Figure 5, below).
More easing measures to support homebuying
FAI in real estate declined by 2.4% y/y in March from a 3.7% increase in Jan–Feb. Construction activities remained subdued in March amid the renewed Omicron outbreaks and sweeping precautionary lockdowns: floor space starts declined by 22.2% y/y, sales of properties fell by 17.7% and completions shrank by 15.5% y/y (see Figure 6, below). Over 100 cities have taken measures to support the property market in recent months, which included the easing of purchase/sales restrictions, lower down payments, and lower mortgage interest rates. We have also observed that the policymakers introduced policies to prop up housing demand amid growth shock in addition to the existing marginal relaxation in developers’ funding source. This change in policy direction will help bring sales back on track as soon as the lockdown restrictions are lifted. However, homebuyers’ expectations for income growth may be weaker due to repeated disruptions. Hence, the pent-up demand for housing is likely to be more moderate than what we saw in 2021 H1.
Loosening monetary policy provides timely support
Monetary data released by the PBoC showed credit growth ramping up again. New long-term household loans (mostly mortgages) rose to RMB753.9 bn in March, after contracting by RMB336.9 bn in February, while corporate loans jumped to RMB2.92 tn in March from RMB1.67 tn in February. Growth of total social financing, a broad measure of credit and liquidity, quickened to 10.6%, from 10.2% in February, and growth of broad money supply (M2) grew by 9.7% from 9.2% in in February (see Figure 7, below). We expect credit growth to continue to increase in the coming months amid declines in borrowing costs and policy support for the housing market.
Meanwhile, the PBoC announced a much-anticipated cut of its reserve requirement ratio (RRR) by 25bps for all banks and an additional 25bps reduction for small commercial banks and selected rural lenders. The move will release RMB530 bn worth of long-term liquidity into the interbank system effective from April 25. Looking ahead, we still expect the PBoC to cut its policy interest rate by 10bps once the Omicron outbreak is more under control.
Zero Covid-19 policy cannot last forever
While front-loaded fiscal spending and monetary support will shore up the slowing economy, the shocks deriving from China's sweeping lockdowns and economic fallout from the Russia-Ukraine war, will enhance uncertainty and continue to constrain economic activities. So far, we do not see the economic stimulus to be effective enough to offset the lockdowns’ economic damage. A better policy option for China’s economy would be to maximise vaccine coverage among the elders, preferably using the more effective mRNA vaccines, and then gradually exit its zero Covid-19 strategy.
If you are keen to hear more about our views on China and global economy, please refer to Global Economic Outlook and/or get in touch with our CRU economists:
Henry Hao: hangwei.hao@crugroup.com
Alex Tuckett: alex.tuckett@crugroup.com
