Beijing will have to pull fiscal and monetary levers if China is to hit its growth target of around 5.5% in 2022 as the country contends with COVID-19, weak consumer spending and a deflating property bubble.
China's economy has slowed, with mixed economic data across retail spending, manufacturing investment and home sales. Still, the projection and recent comments by government officials about using "oxygen-supplying measures" to help fuel growth suggest Beijing will step up policy easing across all fronts — fiscal, monetary, property sector and regulations — and inject more stimulus into key sectors of the world's second-largest economy, economists said.
"The compounding effect of these stimulus measures should help engine a gradual recovery in investment spending in infrastructure, manufacturing and green projects," said Qu Hongbin, chief China economist and co-head of Asian economics research at HSBC. "In addition, further loosening of property related lending restrictions should help put a floor to the housing downturn."
Investment in infrastructure is at the heart of China's growth plan, with spending on transportation, water, communication and green projects all supporting growth.
HSBC expects the measures will help nudge growth toward 5.6% for the full year, with stronger growth in the second half. Other forecasts expect China will fall short. S&P Global Ratings expects policy measures will only drag growth up to 4.8% in 2022, while Oxford Economics expects 4.9%.
"In our view the 'around 5.5%' will be hard to meet, given the headwinds from the property downturn, the impact of the Russia-Ukraine conflict and omicron [coronavirus variant]," Louis Kuijs, chief economist, Asia-Pacific, at S&P Global Ratings, said in an interview. While Russia accounts for just 2% of China's exports, the extensive sanctions applied to Russian companies and banks in response to the invasion of Ukraine have pushed up commodity prices for China.
Growth outlook
GDP growth of 8.1% overall in 2021 ended with 4% in the fourth quarter. After a poor December 2021, retail sales beat expectations in January and February, rising 6.7% year over year, while manufacturing investment was up 20.9%. By contrast, the volume of new home sales was down 22.1%.
In recent years Beijing has been trumpeting sustainability rather than growth for growth's sake as traditional investment in infrastructure caused debt in the nonfinancial corporate sector to soar. Policies to tighten up lending requirements led to mayhem for a number of highly leveraged real estate companies, most notably China Evergrande Group. Trading of Evergrande's shares was suspended March 21 at the company's request as the restructuring of its debts continues.
Household consumption will likely suffer as outbreaks of COVID-19 continue to blight the region. Whereas many developed countries with high levels of immunity are moving beyond COVID-19, China is persisting with a zero-COVID strategy, meaning major cities are vulnerable to repeated lockdowns.
The persistent threat of the virus is most notable in Hong Kong, where the spike in deaths is outstripping the supply of coffins in one of the worst cases of mortality in the course of the two-year pandemic. On the mainland, authorities eased restrictions in Shenzhen last week, while other measures are being taken as and when case numbers flare up.
"Omicron matters because, while generally attaching a lot of importance to growth, China's leadership asks local government to prioritize COVID suppression over growth," Kuijs said.
Chinese consumers have at least avoided the cost-of-living pressures faced in much of the rest of the world. Consumer price inflation rose by just 0.9% year over year in February, compared with 5.8% in the euro area and 7.9% in the U.S.
"There will be some implications from global food and energy prices on China. But they are controllable because most of the suppliers or importers are state-owned enterprises, they may not pass on the all the increase in producer price inflation prices to [the consumer price index]," Iris Pang, chief economist for Greater China at ING, said in an email.
Infrastructure rollout
Economists agree that the ability of Beijing to reach its growth targets will depend not only on its success in limiting the impact of COVID-19 on consumption, but also the speed of its infrastructure investments.
"COVID is important, but not the most important factor for China's outlook, given the swift lockdown strategy," Pang said. Instead, the speed of delivering infrastructure projects will be crucial to meeting growth targets.
Large-scale infrastructure projects, including ones in traditional areas such as transportation and water conservancy, are already underway, as are projects centering on data centers and 5G development.
"Local government special bonds have been pre-approved since December 2021," Pang said. "This implies a fast growth in infrastructure spending should be the engine of economic growth this year."
While the overall level of special local government bond quota was left unchanged at 3.65 trillion yuan, Beijing has already allocated almost half of that early in the year, according to HSBC.
Beijing is also taking the opportunity to push ahead with its green agenda.
"Projects such as electrical grid upgrading, renewable energy development, developing cleaner industrial production processes, and green buildings are some of the areas supporting a further rise in green investment," Hongbin said, noting that infrastructure investment rose by over 8% year over year in the January and February period.
China's stimulus measures will help the country's economy grow near its target, even with headwinds from COVID-19 and the ailing real estate sector, Tommy Wu, lead economist at Oxford Economics, said in a March 15 note.
"But it will be challenging to achieve the growth target of 'around 5.5%' for this year," Wu said.
As of March 21, US$1 was equivalent to 6.36 Chinese yuan.