China: Lowering 2022 growth forecast by 50bps
- 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
- 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.
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