China's growth outlook: counting the cost of Covid lockdowns
Endowus Insights

Leap into prosperity this CNY 💰     Get an $88 head start to growing your wealth.

Leap into prosperity this CNY 💰Get a $88 head start to growing your wealth.

China's growth outlook: counting the cost of Covid lockdowns

Nov 2022
May 2022

Our thoughts:

While Beijing has set an ambitious growth target this year with a generous fiscal stimulus plan, new Covid-19 waves are adding to mounting headwinds amid a slowing global economy.

After a promising start to the year, China’s economy is now facing its worst disruption since the beginning of the pandemic.

Both the manufacturing and services Purchasing Managers’ Indices (PMI) in March fell below 50 points – the level that separates growth from contraction – for the first time since February 2020. Measures to contain Covid-19 outbreaks concentrated in Shanghai, Shenzhen and Jilin have caused sharp declines in mobility and disruption to production, further hurting consumption and services.

Domestic logistics face friction caused by movement restrictions on truck drivers, and strict pandemic controls at major Chinese ports may exacerbate global supply chain woes as port congestion worsens worldwide.

With China unlikely to give up its zero-Covid stance, we expect another month of disruption in the mainland before the situation normalises in May. Given significant headwinds to the nation’s economic growth in the first half of this year, we have revised down our baseline GDP forecast for 2022 to mid-4%, with a wider forecast range to account for heightened uncertainties in both the Chinese and global economy.

Pressure mounts on China’s ambitious 2022 GDP growth target

At the National People’s Congress (NPC) in early March — about a week before Shenzhen’s 17.5 million residents were placed in a week-long lockdown — Beijing had announced a growth target of “about 5.5%” for 2022, beating market expectations.

Although that figure would represent China’s lowest year-on-year GDP growth in more than three decades (with the exception of 2020), it faces challenges including global geopolitical and economic uncertainty, the ongoing pandemic, a troubled domestic housing market and lacklustre consumption.

Along with the target, Beijing also revealed a fiscal stimulus plan that surprised on the upside, with tax cuts and fiscal spending on infrastructure projects the main approaches to boost growth. In spite of the lowering of China’s deficit-to-GDP ratio to 2.8% for 2022 from 3.2% in 2021 (a decrease of more than 200 billion yuan), on-budget fiscal expenditure is expected to increase by more than 2 trillion yuan compared with last year, thanks to the significant fiscal carryover from 2021.

In addition, about 1.2 trillion yuan of local government special bond (LGSB) proceeds that were not used in 2021 could offer extra support to infrastructure spending this year, even as land sale revenue falls short.

Increased policy support to sustain economic and social stability

At the March NPC, Premier Li Keqiang’s Government Work Report emphasised Beijing’s shift of focus from tough structural reforms to economic stability — a particular priority given the political importance of October’s 20 Party Congress of the Communist Party of China and the government reshuffle.

A slew of economic and social development goals for 2022 were unveiled, such as creating more than 11 million new urban jobs and keeping Consumer Price Index (CPI) growth at around 3%. We expect the CPI to average around 2.5% this year, factoring in higher commodity prices due to the Russia-Ukraine crisis but weaker domestic consumption demand.

On the property market, the report reiterated that “housing is for living, not for speculation,” but also stated that the government will support reasonable housing demand, indicating a more balanced tone on property market policies.

With sustainable energy, China will be more flexible with its decarbonisation target and take a more scientific approach to its energy structure transformation. This contrasts to the specific target of trimming energy intensity by 3% in 2021, which triggered disruptive power rationing.

We expect policy easing to accelerate in the near term. Fiscal policy has been in action with front-loaded LGSB issuance to support infrastructure and swift relief programs to help small and medium-sized enterprises that are struggling with the current Covid wave. The People’s Bank of China has stepped up credit supply, but aggregate credit growth remains constrained by weak demand, and thus we expect further sectoral regulatory policy relaxation, especially in the housing market, to lift demand. Interest rate and reserve requirement ratio (RRR) cuts are also likely to follow in Q2 2022.

Impact on growth will depend on length of lockdowns

Our mid-4% China GDP forecast for 2022 takes into account the fiscal upside surprise, the better-than-expected economic performance in the first two months of this year, as well as the impact of the Omicron wave and the Russia-Ukraine crisis – and assumes that the current outbreak will get largely under control by May.

We think the impact on China’s exports could still be manageable if lockdowns are not synchronised across major ports and domestic production remains intact. When Shenzhen’s Yantian port suspended operations for weeks in May and June last year, for example, large quantities of cargo were diverted to ports in other areas, thereby keeping summer exports strong at nearly 30% year-on-year.

Overall, we think the length of disruption will be key. China will likely prevent a large-scale synchronised lockdown across the country and we expect further outbreaks to face the same strict – but short – lockdown as Shenzhen, rather than Shanghai’s unsuccessful attempt at phased lockdowns. China’s flexible labor market and domestic supply chain could help mitigate the impact on production if disruptions are temporary. However, the longer local lockdowns last, the harder it will be for factories to make up losses.

For details on our outlook for the global economy in the year ahead and the investment implications, please read our latest Cyclical Outlook, Anti-Goldilocks."

This article was originally published on 13 April 2022 by PIMCO.

PIMCO is one of the world's premier fixed income investment managers managing $2 trillion in assets for central banks, sovereign wealth funds, public and private pension funds, corporations, foundations and endowments, and individual investors. Founded in 1971, PIMCO introduced investors to a total return approach to fixed income investing. In the 50 years since, PIMCO has continued to bring innovation and expertise to its partnership with clients seeking the best investment solutions. Today the firm has offices across the globe and professionals united by a single purpose: creating opportunities for investors in every environment. PIMCO is owned by Allianz S.E., a leading global diversified financial services provider.

To explore Fund Smart options on Endowus, click here.


PIMCO disclaimer

PIMCO Asia Pte Ltd is regulated by the Monetary Authority of Singapore as a holder of a capital markets services license and an exempt financial adviser. The asset management services and investment products are not available to persons where provision of such services and products is unauthorised.

Forecasts, estimates and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. There is no guarantee that results will be achieved.

PIMCO as a general matter provides services to qualified institutions, financial intermediaries and institutional investors. Individual investors should contact their own financial professional to determine the most appropriate investment options for their financial situation. This material contains the opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a trademark of Allianz Asset Management of America L.P. in the United States and throughout the world. ©2022, PIMCO.


Endowus disclaimer

This article is for information purposes only and should not be considered as an offer, solicitation or advice for the purchase or sale of any investment products. It is recommended that you seek financial advice as to the suitability of any investment. Whilst Pte. Ltd. (“Endowus”) has tried to provide accurate and timely information, there may be inadvertent delays, omissions, technical or factual inaccuracies or typographical errors.

Any opinion or estimate above is made on a general basis and none of Endowus, nor any of its affiliates, representatives or agents have given any consideration to nor have made any investigation of the objective, financial situation or particular need of any user, reader, any specific person or group of persons. Opinions expressed herein are subject to change without notice.  

Investment involves risk. The value of investments and the income from them can go down as well as up, and you may not get the full amount you invested. Past performance is not an indicator nor a guarantee of future performance.

Please note that the above information does not purport to be all-inclusive or to contain all the information that you may need in order to make an informed decision. The information contained herein is not intended, and should not be construed, as legal, tax, regulatory, accounting or financial advice.

More on this Tag

Table of Contents