China Economic Update 2022 Q1

By: Travis Joern

Stakeholder Communications Director, FII China

China’s Gross Domestic Product (GDP) expanded by 4.8% in the first quarter of 2022 from a year earlier, topping expectations of a 4.4% increase and picking up from 4.0% in the fourth quarter of 2021. However, the domestic spread of the Omicron variant of COVID-19 in cities such as Changchun, Shanghai and Shenzhen have led to a tightening of pandemic-control measures in March, which has not been fully captured in the first-quarter data and might threaten economic growth in the months ahead.

The lockdowns in those cities have put additional pressure on retail, manufacturing and financial sectors, along with new disruptions to local supply chains. The Caixin China General Manufacturing Purchasing Managers’ Index (PMI index) came in at 48.1 in March, down from 50.4 the previous month, which is the lowest ranking for the index since February 2020. The ongoing challenges to business operations, rising costs and the conflict in Ukraine are all weighing on business confidence for the year ahead. Market demand has weakened, especially for consumer goods, and uncertainty abroad has increased. The war between Russia and Ukraine along with the economic sanctions against Russia have added new disruptions to supply chains and volatility to commodity prices.

These various factors resonate, exacerbating the downward pressure on China’s economy and highlighting the risk of stagflation. The unemployment rate across 31 major Chinese cities rose from 5.4% in February to 6% in March — the highest on record according to official data going back to 2018. The economy created 1.2 million new urban jobs in March, which is 18% less than in March 2021. Policymakers face a complex challenge to improve the precision of epidemic control measures to strike a balance between maintaining the normal production levels and the quality of life of affected residents while protecting the safety and health of the people.

In terms of the currency exchange rates, CAD/CNY fluctuated sharply in Q1 2022 and fell to its lowest point 4.901 CAD/CNY in March 9.

Economic Outlook

The annual conferences of the National People’s Congress (NPC) and the Chinese People’s Political Consultative Conference (CPPCC), commonly known as the “Two Sessions” meetings in March 2022 highlighted economic stability as one of the main priorities for 2022. Having achieved 8.1% economic growth in 2021, the government aims to expand GDP by “around 5.5%” in 2022, with indigenous innovation, digitization and decarbonization as key long-term commitments.

Challenges raised during the Two Sessions include ongoing COVID-19 outbreaks, a decline in consumer demand, disrupted supply chains, sluggish investment recovery, unsteady export growth, inadequate supply of energy resources and raw materials, and financial risks. Top-line goals for stability include financial de-risking, stabilizing food and energy supplies, and promoting low-carbon development.

In a break from previous years, the government avoided setting an energy intensity target, signaling a shift to a more flexible and sustainable decarbonization policy given the energy crisis that impacted factory production in 2021. It has been announced that domestic coal production will grow by 300 million tons this year, or by 7.3% year on year. The State Council also announced the building of six new nuclear power plants to bolster the country’s base load capacity of electricity and pledged to increase China’s clean energy production to 1,700 GW by 2030.

The forecasts of the Economist Intelligence Unit (EIU) under the Economist Group have fluctuated over the last couple months. Expectations were lowered to 5.2% GDP growth as the lockdowns took effect, but stronger government spending has led them to raise their real GDP forecast up to 5.5%. Indications show that officials will adopt looser monetary and fiscal policies, and soften the policy restrictions that had been implemented in technology and property sectors in 2021. Such monetary easing should accelerate public infrastructure investment, which will overshadow general private-sector investment. There are concerns that these stimulus efforts will worsen some of the systemic imbalances, which will preserve risk around financial instability in ways that could risk longer-term growth.

The IMF downgraded China’s forecast by 0.8 percentage points to 4.8% in 2022 with growth to edge higher again to 5.2% in 2023. The IMF is not optimistic about China’s zero-Covid policy and says it likely to weigh on consumption and construction prospects. The spread of the Omicron variant poses renewed challenges to the sustainability of China’s current tactics, but these concerns will not prompt China to pivot away from its zero-covid framework within this year, let alone adopt a “living with covid” approach. The government stance was reiterated by Vice-Premier Sun Chunlan, who called for resolute adherence to “dynamic zero-covid” as an overarching principle during a trip to Shanghai on April 3rd.

The common prosperity campaign remains an important focus to reduce income inequality with pro-labor policies and improved access to social welfare for lower income groups as well as gig workers for delivery apps. The common prosperity campaign will drive more investments into urban renewal and rural development, to improve living conditions and expand infrastructure for the delivery of public services.

The Construction Sector

According to the National Bureau of Statistics (NBS), the average new home prices in China’s 70 major cities rose 1.5% and easing from a 2.0% gain in February, pointing to fragile demand as growing Covid-19 lockdown measures dampened consumer confidence. This was the weakest rise in new home prices since November 2015, as Beijing’s deleveraging campaign in 2021 triggered a liquidity crisis in some major property developers. Over 60 cities have eased curbs on home purchases to support the ailing property market as the surge in Omicron cases and strict lockdown measures have again cooled demand in many cities.

The chart above shows the trend for total construction project starts and the total projects completed in the corresponding quarter. The total floor area starts in China in Q1 2022 was at 919 million m2, growing 48 percent compared to the same period in 2021 (619 million m2). The total floor area completed in China in Q1 2021 was at 641 million m2, dropping 36 percent compared to the same period in 2021 (1,010 million m2).