Momentum for China in the Year of the Tiger

In the coming Year of the Tiger, many forecasts show economists generally expect a decline in growth in China. But momentum is changing.

Traditional Chinese art usually depicts a pair of tigers, one going uphill and the other going downhill. The former represents peace and stability while the latter represents aggression.

These two contrasting poses are symbolic of China’s economic outlook over the next 12 months. The proactive counter-cyclical measures in the earlier part of the year may help stabilise the growth profile and the policy tone may change in the second half of the year.

China’s relative economic weakness will continue in the first quarter of 2022, largely due to ongoing virus containment measures in the country. But change in cyclical momentum is likely as the year continues. As such, ANZ Research has lifted its full-year Chinese gross domestic product forecast to 5.0 per cent, from 4.6 per cent previously.

The intensity of China’s counter-cyclical supports has increased. Economic indicators will likely improve in response to stimulus. As growth stabilises, policymakers may change their tone and signal a taper at the Politburo meeting in July.

A big year ahead

The Chinese economy experienced one of its weakest recent quarters at the end of 2021. The economy made an exceptionally strong start in 2021, allowing policymakers to deprioritise growth and focus on structural reforms. However, economic momentum slid over the second half.

Policymakers subsequently shifted back to supporting growth. Although annual growth still beat policy targets, the cyclical downturn prompted the government to inject stimulus.

Chinese policymakers have a zero-tolerance stance towards COVID-19. In addition, authorities regard the upcoming Beijing Winter Olympic Games to be a historic event to be protected from the pandemic at all costs.

After the Games, Beijing will need to prepare for the National People’s Congress likely to be held in March. As the coronavirus threat is unlikely to disappear in the near term, travel restrictions will likely remain.

Weakness in the property sector will also likely linger. Risk aversion will persist amid liquidity constraints and the sector’s uncertain long-term outlook.

China’s services sector remains dampened. Assuming authorities can tame Omicron over the next two months, ANZ Research expects China’s services growth to stabilise in the second quarter.

Stable momentum

China’s State Council was tasked with growth stabilisation at the Central Economic Work Conference in December.

This means the People’s Bank of China will maintain its easing bias. The intensity of the easing cycle can be seen in its credit impulse, which bottomed out in the fourth quarter – when the PBoC began easing – as nominal GDP growth slowed.

The recent cuts in the loan prime rate suggests banks are responding to this shift. A genuine improvement in lending and local government bond issuance will continue to buoy China’s credit impulse in the first half.

During the last decade, China’s reflation strategy successfully boosted cyclical growth on several occasions. The relending facility also helped to release post-COVID pent-up demand in the second half of 2020, as indicated by the change in manufacturing PMI.

There seemed to be a coincidental move between China’s PMI and its credit impulse during the reflation trade in 2020, similar to the GFC when China announced its stimulus. However, the improvement in China’s PMI in in the fourth quarter of 2021 was more to do with the easing of supply-side constraints, and did not fully respond to the rebound in the credit impulse.

As credit woes in the property sector spread, authorities relaxed curbs in November, leading to an improvement in the construction PMI before it dipped again in December.

The State Council has requested local governments increase their ‘effective’ investments, which will promote the transmission of the credit impulse to real economic activity. Besides calling for the implementation of infrastructure projects, it’s likely the State Council will launch more growth supportive measures.

Given the improvement in financial conditions, many economic activities will resume as pent-up demand is unleashed after the Beijing Olympics and March’s NPC.

ANZ Research expects China’s first-quarter GDP growth will improve only slightly to 4.7 per cent, year on year, due to the authorities’ strict zero-COVID stance. However, post-COVID rebounds in the services sector and infrastructure projects will help stabilise growth at 4.8 per cent in the second quarter. The headline growth is distorted by the high base. The effects of the credit and fiscal impulses will support a sequential growth of 1.4 per cent quarter on quarter.

In the second half of 2022, the pace of expansion will likely moderate to 1.2 per cent, due to the tapering of supportive policy.

Adjustment

China’s Politburo introduced the concept of ‘cross-cyclical adjustment’ in July 2020. This means counter-cyclical support is only temporary. Sustainable growth through medium-term measures is preferred.

In July 2021, the Politburo reiterated this cross-cyclical adjustment strategy and reminded the State Council to prioritise structural reforms; this has been guiding policy decisions.

Against this backdrop, the PBoC will want to avoid excessive monetary easing for too long as it needs to focus on medium-term economic goals. If the cyclical momentum improves and growth is largely stabilised by the end of the first half, the Politburo will likely adjust its monetary policy stance, very likely at its meeting in July.

The yuan was supported by China’s solid current account as well as portfolio inflows in 2021. In theory, the shift towards a managed floating regime has allowed China to adopt a more independent monetary policy. However, with 2022 as a crucial political year, ahead of the 20th Party Congress, authorities will likely want to maintain currency stability.

ANZ Research expects the PBoC to take into consideration the policy direction of the US Fed to determine the magnitude of monetary easing needed.

Raymond Yeung is Chief Economist, Greater China, Betty Wang is a Senior China Economist & Zhaopeng Xing is a Senior China Strategist at ANZ

This piece is an edited excerpt from the ANZ Research report ‘China’s cyclicality in the Year of the Tiger’, published January 17, 2022. Click to read the full document.