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Inside China 31 March 2022

Policy stance, explored

Jeremy Stevens

Reviewing the lay of the land in China

  • In its quest for ensuring macroeconomic stability, Beijing is targeting growth of 5.5% for 2022, seemingly having abandoned the medium-term objectives such as de-risking and deleveraging. Encouragingly, China has managed rather fair macroeconomic data in both January and February, implying achievable GDP growth for Q1:22. This is significant because a big miss would mean that achieving an already ambitious growth target for 2022 would require far more heavy lifting from both fiscal and monetary policy.
  • A rising tide of voices argue that monetary policy needs to more forcefully aim at easing domestic conditions, propagating an acceleration in credit expansion. However, so far, policymakers have been reluctant, and credit growth slowed in February. We foresee an even larger deviation in domestic monetary conditions, heightening the risk of capital outflows, which, in the aftermath of Russia’s invasion of Ukraine, have been considerable.
  • Many expect more easing for the property sector. To date, the primary focus has been to stabilise the developers by ensuring the completion of the stock of started projects and secure these projects’ respective supply chains. However, dealing with the pipeline of existing projects is one thing, but does little to deal with the slump in new projects, and this will hurt local government finances, and, despite some reductions in mortgage rates, home sales, along with land sales and floor space started, have slumped.
  • In terms of public works, Beijing is still attempting to focus on aligning investment to longer-term plans, siphoning credit to sectors deemed conducive to economic restructuring. The extent to which Beijing attempts to stimulate via local government infrastructure projects will probably be determined by how effective tax cuts and refunds – the spearhead of this year’s fiscal policy – are spurring business activity. The reservation isn’t so much supply, but rather demand being constrained. And, of course, the government deficits rising implies that China is running out of room for further tax cuts.
  • Markets especially welcomed the commitment by policymakers to a more predictable and coordinated policy landscape. However, behaviour and comments from the various agencies suggest that, at best, the regulatory clampdown may be paused, but it is more likely to continue, a sentiment confirmed by most tech firms during results presentations in recent days.
  • Finally, a comment on Common Prosperity, which many believe was one of the concepts abandoned in this year’s GWR. Simply put, that’s wrong: the focus on small business and entrepreneurs, exemplified by increasing SMEs access to credit and reducing their taxes, fees and costs, is utterly consistent wanting to unlock new sources of wealth generation.

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