China: Lowering 2022 growth forecast by 50bps

Economic activities deteriorated across the board in March in the face of a continued housing downturn and increasing mobility restrictions across the country.
Group Research, Nathan Chow 周洪禮18 Apr 2022
  • China’s real GDP grew by 4.8% YoY in 1Q; activities deteriorated across the board in March
  • A prolonger lockdown would exacerbate already strained supply chains and subdue consumption
  • Still, PBOC refrained from cutting MLF rate and lowered RRR by only 25bps last Friday
  • Implications to our forecast: We are revising down our 2022 real GDP forecast to 4.8% from 5.3%
  • Implications for investors: Fixed income investors should turn defensive
Photo credit:AFP

China’s economy grew 4.8% YOY in the first quarter, rising from 4.0% in 4Q21. On a quarter-on-quarter basis, GDP growth slowed to 1.3% from 1.5% previous quarter. Economic activities deteriorated across the board in March in the face of a continued housing downturn and increasing mobility restrictions across the country:

  • Retail sales contracted 3.5% YoY, the first decline since July 2020.
  • Industrial production growth slowed notably to 5.0% from 7.5% in January-February.
  • Growth in fixed asset investment fell to 9.3% from 12.2% in the first two months.

The latest batch of data confirm our cautious view on the sustainability of the January-February’s rebound. Note that March’s data probably missed most of the blow from the Shanghai lockdown.

Mirroring today’s print is the sluggish corporate long-term lending, indicating downbeat business sentiment and regulatory uncertainty.
Household long-term loans also suffered a fourth consecutive month of YoY contraction in March amid persistent weakness in home sales. Meanwhile, delayed financial results have further weighed on developer bond and share prices. Liquidity conditions remain strained despite a recent pledge by the Financial Stability and Development Committee to diffuse housing risks.

On a positive note, the government has tweaked it’s zero-COVID policy to lessen economic disruption. Factories resumptions were allowed in Shenzhen after days of a citywide lockdown. Shanghai’s port, the world’s biggest, also maintain operations while virus controls are in place. Altogether both cities accounted for one-third of the nation’s trade, the policy tweak alleviated concerns of a repeat of the 2020 months-long economic logjams.

Yet large-scale contact tracing system and isolation measures leave the shipping and logistics sectors alike understaffed. Vessel queues off Shanghai as of 11 April was 15% higher than a month earlier. Labor shortage lengthening delivery time means supply chain backlogs to persist even if mobility restrictions ease. Of note is the tech supply chain; about half of the country’s semiconductors were shipped from Shanghai. A prolonged lockdown would also wreak further havoc on services and consumption, curbing Q2’s retail uptick. Shanghai is the largest contributing city to the country’s retail sales (4%). Adding to the pressure is the external headwinds, including weaker demand from Europe and negative terms of trade in the face of rising raw material prices (see “China: Strong headwinds”, 15 Mar).

Front-loading infrastructure projects may mitigate some of the downside risks. Targeted measures are also warranted to relieve downstream manufacturers whose margins were squeezed by elevated input costs. Capital exodus as a result of divergent PBOC-Fed monetary policy is not of imminent concern. FX pool accumulated by Chinese Inc. and banks over the past two years, on top of official forex reserves, could provide substantial buffer.

PBOC will become more wary of the rising odds of 50bp rate hikes by the Fed at both the May and June meetings (see “Macro Insights Weekly: Implications of ratcheting rate hike expectations”; 18 March). Room for further reserve ratio cut is indeed narrowing. Friday’s reduction has brought commercial banks’ RRR to the lowest level since 2007. Subdued loan demand due to regulatory clampdown and pandemic controls are also hindering the efficacy of monetary policy. All told, we are revising down our 2022 real GDP forecast to 4.8% from 5.3%. Fixed income investors should turn defensive in view of PBOC’s increasing restraint on policy easing.

To read the full report, click here to Download the PDF.


Nathan Chow 周洪禮

Senior Economist and Strategist - China & Hong Kong 高級經濟學家及策略師 - 中國及香港


Subscribe here to receive our economics & macro strategy materials.
To unsubscribe, please clickhere.

GENERAL DISCLOSURE/ DISCLAIMER (For Macroeconomics, Currencies, Interest Rates)

The information herein is published by DBS Bank Ltd and/or DBS Bank (Hong Kong) Limited (each and/or collectively, the “Company”). This report is intended for “Accredited Investors” and “Institutional Investors” (defined under the Financial Advisers Act and Securities and Futures Act of Singapore, and their subsidiary legislation), as well as “Professional Investors” (defined under the Securities and Futures Ordinance of Hong Kong) only. It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. This research is prepared for general circulation.  Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies.  The information herein is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident of or located in any locality, state, country, or other jurisdiction (including but not limited to citizens or residents of the United States of America) where such distribution, publication, availability or use would be contrary to law or regulation.  The information is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction (including but not limited to the United States of America) where such an offer or solicitation would be contrary to law or regulation.

This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) which is Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Singapore recipients should contact DBS Bank Ltd at 65-6878-8888 for matters arising from, or in connection with the report.

This report has been prepared by a personnel of DBS Bank Ltd who is not licensed by the Hong Kong Securities and Futures Commission to carry on the regulated activity of advising on securities in Hong Kong pursuant to the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong).  This report is being distributed in Hong Kong by DBS Bank Ltd, DBS Bank (Hong Kong) Limited and DBS Vickers (Hong Kong) Limited.

DBS Bank Ltd., 12 Marina Boulevard, Marina Bay Financial Centre Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E. 

DBS Bank Ltd., Hong Kong Branch, a company incorporated in Singapore with limited liability.  18th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.

DBS Bank (Hong Kong) Limited, a company incorporated in Hong Kong with limited liability.  11th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.

Virtual currencies are highly speculative digital "virtual commodities", and are not currencies. It is not a financial product approved by the Taiwan Financial Supervisory Commission, and the safeguards of the existing investor protection regime does not apply.  The prices of virtual currencies may fluctuate greatly, and the investment risk is high. Before engaging in such transactions, the investor should carefully assess the risks, and seek its own independent advice.