China: still Asia’s engine for growth
Even before this year’s impact to growth from the Russia – Ukraine conflict and its COVID lockdowns, China’s overall policy had shifted to an expansionary mode. This shift has now become more pronounced, to counter the effects of these events in the first half of 2022. China has reduced base rates, lowered the reserve ratios of its commercial banks, and is encouraging local government to raise their full funding for infrastructure projects. Furthermore, numerous targeted measures have been introduced to support key areas such as housing and consumption.
Even so, China’s real GDP growth target of 5.5% this year looks unlikely to be met without further stimulus measures. In November, the Communist Party will be holding its 20th National Congress, where President Xi is expected to bid for an historic third term, which makes achieving growth close to the target more important than usual. Therefore, we expect continued policy support from here, and recent comments from Xi have confirmed his commitment to meeting this growth target.
A revised approach to COVID
There has been a subtle (but important) revision to China’s much-criticised zero-COVID approach, with the move from “COVID zero” to “COVID zero in the community”. In summary, this means infections will be tolerated so long as the infected are in, or taken to, isolation. This is now only one step (home isolation) away from the approach seen in the west through 2020-21.
It’s also important to remember that China had imposed no COVID lockdowns since the brief Wuhan restrictions in the first quarter of 2020. There was, therefore, little experience of how to manage lockdowns without disruption. Lessons were learnt during the Shanghai lockdown that enabled a gradual recovery in the economy to happen before the lockdowns were fully eased. As a result, we would expect any future lockdowns to have far less impact on activity.
China’s harsher regulatory climate looks to be softening
China has also been making encouraging statements in terms of supportive regulation for companies. This is a notable shift – particularly given the regulatory crackdowns experienced by many sectors during 2021 – and could turn regulation from a headwind to a tailwind for Chinese companies. Politicians, officials and regulators have issued several statements in recent weeks confirming their shift towards supporting growth and internet companies, highlighting how integral they are for a healthy, growing economy. A recent hiatus on gaming approvals has also ended, lending further support to China’s domestic platform companies.
US and Chinese regulators are also making progress towards a solution that would enable Chinese American Depository Receipts (ADRs) to remain listed in the US. The ADR issue and the potential de-listing of China stocks from the US had been a sizeable headwind for stocks and internet platform companies in particular. We expect a resolution would be a huge positive for overall sentiment.
Property initiatives have also been an area of focus for Beijing. This includes making it easier to obtain mortgage lending, reducing the minimum down-payment for home purchases and encouraging bank lending to developers. The property sector is a key contributor to China’s GDP and as such we expect further support in support of reaching this year’s growth target.
There is also the potential for the removal of the Trump-era trade tariffs, partly due to the current inflation challenges being experienced. The US is considering removing these tariffs on China imports and if removed, it has been estimated this could reduce US inflation by up to 1%.
