A long look at H2:22
Supply-side initiatives supportive – but demand still soft
- China’s economy improved in May and June. It had contracted in April, then growth was marginally positive in May, and probably better in June, which implies Q2:22 GDP growth of 2%.
- As in 2020, the 2022 recovery thus far has been driven mainly by exports, industrial production, investment; however, the services sector and domestic consumption have not yet fully recovered. Particularly concerning in the near- and longer term is sluggish household spending which has been restrained directly by the lockdowns and indirectly by concerns about future income and employment.
- The dislocation between domestic supply and demand has led to burgeoning inventories, and much will depend on how fast those will be cleared – especially as external demand too faces headwinds.
- Policymakers have been focusing on supply-side interventions, keeping China’s businesses afloat via ample access to credit and reducing fees, whilst supporting infrastructure investment. Senior leadership has accelerated construction projects, especially in the manufacturing, technology, energy and food sectors; instructed local governments to complete the issuance of SPB for infrastructure by June; ensured monetary accommodative policy; provided additional measures to support infrastructure spending, such as the PBoC pledged lending faculty; eased the regulatory overhang on some of those sectors that have been caught in a “regulatory storm” – namely big tech; and permitted a more tailored approach to real estate – to be adjusted according to local conditions.
- The measures (mentioned above) should spur economic activity in H2:22 but they certainly won’t achieve the requisite 7.5% in H2:22 to match the growth target (which seems to have quietly exited discussions). In fact, even the 6.4% average growth rate in H2:22 forecast by the China Macroeconomic Forum is conditional on more impetus – especially in demand. Rather inadequate coupons to individuals, to spur consumer spending, have failed thus far to move the dial.
- Hopefully, China can maintain its relaxation of the Covid Zero policy during 2H, which should then incur some recovery – perhaps like the rebound in consumption and services in 2H:20. However, further major outbreaks may trigger further lockdowns. As Covid is here to stay, the threat of ongoing lockdowns will likely persist. With local governments, businesses and households wary of further outbreaks, any notable recovery is probably unlikely.