The economy of China grew by 8,1% in 2021, returning to pre-Covid-19 levels. However, growth lost momentum in the second half and GDP increased by only 4% year-on-year in the fourth quarter, due to new outbreaks of Covid-19, energy shortages and problems in the real estate sector. atradius expects Chinese economic growth to slow to less than 5% in 2022. Currently, the impact of the war in Ukraine, with the sharp increase in commodity prices and lower demand from a key region such as Europe, fuels downside risks to the economic outlook.
China: still problems with Covid
Beijing pursues a “zero-Covid” strategy, imposing rigorous containment measures in areas where infections emerge (strict lockdowns, extensive testing, robust contact tracing systems and quarantine mandates). Therefore, outbreaks of the virus, although small by international standards, limit internal consumption and have a negative impact on supply chains. Since the beginning of March, cases of Covid-19 have increased and temporary lockdowns and/or restrictions have been imposed on Jilin province, as well as some larger cities such as Shenzhen (major manufacturing hub) and Shanghai.
consumption
This year it is expected that private consumption growth will slow down less than 5%. Retail sales are expected to increase 5,4% after growing 13,4% in 2021 and the performance of the hotel and restaurant segment remains sluggish due to travel restrictions and local outbreaks. Apparently, consumers tend to save rather than spend due to uncertainty. If the current surge in Covid-19 cases persists, both retail sales and household consumption could deteriorate in the first half of 2022, leading to a lower-than-expected GDP growth rate.
Exports
Le exports increased by more than 18% in 2021, but growth started to slow in the fourth quarter and will likely slow to 4,5% in 2022. This is due to the ongoing bottlenecks in transport and electricity supply, further lockdown measures and geopolitical issues. In particular, the less demand from Europe triggered by the economic impacts of the war in Ukraine could further dampen Chinese exports. Against this backdrop, US President Joe Biden has not reversed the tariffs imposed by the Trump administration, which will continue to impact a wide range of Chinese export goods.
Real estate sector
Il real estate sector, which accounts for about 25% of economic output, will face modest investment this year and remain weak, with repercussions on the banking sector.
Monetary and fiscal policy
China is likely to pursue an accommodative monetary policy, with the People's Bank of China that will lower official interest rates slightly in the first half of 2022. Fiscal policy will remain loose throughout the year, in order to contain the more marked slowdown in growth. And, as in 2021, business investment will benefit from government incentives. Beijing has announced plans to increase spending on some of the 102 mega-projects outlined in the current five-year plan (2021-2025); in addition, the administration announced tax cuts for SMEs and manufacturing companies. The fiscal measures are expected to strengthen liquidity in the real estate sector and, if necessary, support domestic consumption. Furthermore, the budget deficit will remain relatively high in 2022 (7,6% of GDP) and 2023 (6,6% of GDP).
Foreign exchange reserves
With about 25% of GDP, the public debt/GDP ratio officer remains low. The international reserves of China remain abundant, with 14 months of import coverage and 2,9 times external financing needs. The large reserves are due to China's structural current account surplus, expected at 1% of GDP this year. The surplus is expected to decrease slightly in the coming years, due to a slow recovery in outbound tourism and high demand for raw materials. External debt remains sustainable, at 14% of GDP and 75% of exports of goods and services.
