China’s economic growth started to slow down in March, then activity contracted in April (industrial production: -2.9% year-on-year, services production: -6.1% y/y). This rapid deterioration has principally resulted from mobility restrictions implemented in various provinces of the country in response to the epidemic wave. Most importantly, stringent lockdowns have been imposed in some major industrial and port regions (notably Shanghai), which has dampened activity in manufacturing factories, disturbed transport of goods and leading to supply chain disruptions in many sectors. Overall, the health situation and the level of mobility restrictions in China are improving in May. Local economic activity may therefore be able to recover at least slightly.
After an extremely solid performance in 2020 and 2021, export growth will slow steeply in 2022. Export growth rates have already been normalising in recent months, and the slowdown is expected to deepen in Q2 2022. This is the consequence of supply-side constraints due to disruptions in factories, supply-chain difficulties in the manufacturing sector and problems with goods transport following lockdowns in several main industrial and port regions (notably Shanghai). Exports to other Asian countries (47% of China’s total exports) were the first to be hit by China’s logistics problems and slowed markedly in March. On the demand side, the outlook has been worsening since the beginning of the war in Ukraine
China’s economic growth reached 4.8% year-on-year (y/y) in Q1 2022. It improved slightly over the first two months of the year, both in industry and in services, but this recovery was cut short in March. Economic conditions have worsened rapidly, as our barometer shows (narrowing of the blue area relative to the dotted area). This deterioration has resulted primarily from the resurgence of Covid-19 and mobility restrictions imposed in a number of regions in the country. In addition, short-term growth prospects are also looking bleaker due to deterioration in the international climate triggered by the war in Ukraine.
After a strong start in 2022, China’s economic growth slowed in March. Headwinds are expected to persist in the very short term. Firstly, the rapid surge in the number of Covid-19 cases has led many regions to impose severe mobility restrictions. Secondly, the property market correction continues. Thirdly, producers and exporters will be affected by the impact of the war in Ukraine on commodity prices and world trade. Therefore, China’s official economic growth target, which has been set at 5.5% for 2022, seems highly ambitious. The Chinese authorities are accelerating the pace of fiscal and monetary easing.
After a strong start in 2022, China’s economic growth slowed in March. Headwinds are expected to persist in the very short term. Firstly, the rapid surge in the number of Covid-19 cases has led many regions to impose severe mobility restrictions. Secondly, the property market correction continues. Thirdly, producers and exporters will be affected by the impact of the war in Ukraine on commodity prices and world trade. The Chinese authorities are bound to accelerate the easing of economic policy.
Economic growth picked up in the first two months of 2022, but this improvement will probably halt in March.In the services sector, growth was 4.2% year-on-year (y/y) in January-February, which is low, yet this figure is higher than the 3.3% reported in Q4 2021. The same observation can be made for retail sales volumes, which rose 4.9% y/y in January-February, up from less than 2% in Q4 2021.
Economic indicators for the fourth quarter of 2021 confirm that China’s economic growth has been heavily constrained by the crisis in the real estate and construction sectors, the authorities’ zero-Covid strategy and the persisting weakness of household consumption. Export activity remains buoyant. However, it could start flagging in the very short term due to weaker momentum in global demand and the Omicron wave’s repercussions on factory production and the transportation of goods. The Chinese authorities are gradually easing their monetary and fiscal policies to support economic activity. At the same time, they are expected to continue cleaning up the property market, reducing financial risk and tightening regulation.
Chinese economic growth slowed to 4% year-on-year in Q4 2021 from 4.9% in Q3. In the industrial sector, the situation improved slightly in Q4 after a summer that was badly disrupted by power cuts and supply-chain problems. Industrial growth accelerated from 3.1% y/y in September to 4.3% in December, driven by the still strong performance of exports (up 22.9% y/y in Q4). In the immediate future, however, manufacturing output and exports are likely to suffer from repercussions arising from the latest wave of the pandemic.
Economic figures for November once again show the dynamic momentum of Chinese exports (+21.4% year-on-year in current dollars), which continues to drive production and investment in the manufacturing sector. Our barometer highlights a deteriorated industrial performance in September-November 2021 compared to the previous 3-month period. Yet the industrial situation has been picking up slowly since October, after major disruptions in September due to power outages and supply chain disruptions. Industrial production rose 3.8% y/y, compared to 3.5% in October.
The crisis in the real estate sector, the “zero Covid” strategy in the midst of a resurgent pandemic, and the persistent fragility of household consumption are some of the main risk factors straining China’s economic growth. In the short term, the authorities are expected to cautiously step up monetary and fiscal policy support while maintaining their focus on rebalancing the property market, reducing financial risks and tightening the regulatory environment.
Our monthly Pulse highlights the cyclical deterioration of the Chinese economy in August-October 2021 compared to the previous 3-month period. While the situation in the industrial sector improved in October after a sharp slowdown in September, the correction in the real estate sector has continued. Industrial production growth picked up slightly in October (+3.5% y/y in real terms, compared to 3.1% in September and 5.3% in August). In fact, the measures introduced by the authorities rapidly eased energy constraints last month.
Chinese real GDP growth slowed to 4.9% year-on-year (y/y) in Q3 2021 from 7.9% in Q2 2021. In the services sector, growth slowed sharply in August (+4.8% y/y), due notably to the reintroduction of lockdown measures to counter a new surge in Covid-19 cases. Although services growth rebounded in September (+5.2%), it is still sluggish. Tighter regulations in a number of segments, including online services, tutoring and video gaming, have constrained activity. The services sector has also been hit by the downturn in the real estate market due to a severe tightening of prudential regulations and credit conditions in the sector. In Q3 2021, house sales contracted while property developers have encountered increasing financing and cash-flow problems
The Chinese economy is in the midst of a period of major adjustments. They arose after Beijing tightened regulations in a variety of sectors, from housing to certain new technologies and activities linked to the societal challenges facing the country. The adjustments can also be attributed to the debt excess problem of some state-owned and private enterprises, and reflect the authorities’ determination to tighten their access to credit and to clean up practices in the financial sector. As a result, an increasing number of corporates is defaulting, and the troubles of the property developer Evergrande are symptomatic of the changes under way
China’s public finances have been deteriorating for several years now, and the trend accelerated in 2020 with the Covid-19 crisis. Reforms introduced since 2014 have made the public sector’s accounts more transparent and improved the management of local governments’ budgets and debt. However, those changes have not stopped fiscal imbalances building up. In addition, large quasi- and extra-budgetary operations exist alongside the official budget, and there are many, sometimes opaque, links between the various public-sector entities. This means that analysing the public finances is often a complicated exercise.
China’s economic growth slowed sharply over the summer. Lockdown measures reintroduced in response to the resurgence of the Covid-19 pandemic and the threat of the new Delta variant dealt another blow to private consumption. Growth in retail sales volumes dropped to 6.4% year-on-year in July and then to 0.9% in August, from an average of 11.9% in Q2 2021.
Economic growth reached 7.9% year-on-year (y/y) in Q2 2021 vs. 18.3% in Q1 2021. This apparent slowdown is the result of growth rates gradually returning to normal in all sectors and all demand components; it was largely expected as base effects have become less favourable since last spring. This trend explains the contraction of the blue area compared to the dotted area in our Monthly Economic Pulse.
Economic growth rebounded very rapidly following the Covid-19 shock, but this rebound has also been characterised by mixed performances between sectors and between demand components. Growth of industrial production and exports accelerated vigorously until early 2021 and is now gradually returning to normal. Meanwhile, the services sector and private consumption were slower to rebound, and their recovery still proved to be fragile in Q2 2021. Consequently, the authorities are likely to be increasingly cautious about tightening economic policy. Even so, they should still give priority to slowing down domestic credit growth and adjusting the fiscal deficits.
After a very strong post-Covid rebound, industrial production growth rates continue to normalize (+8.8% year-on-year in May). Export growth has also turned lower but is still very strong (+27.6% y/y in value terms). Meanwhile, recovery in the services sector and private consumption continues but remains much more fragile.
Foreign investors have significantly increased their purchases of Chinese local bonds since Q2 2020, targeting sovereign papers particularly. In fact, foreigners are currently holding only 3% of the total stock of Chinese local bonds, but 10% of the total stock of central government papers. Foreign investors’ holdings of local bonds increased by RMB 120 bn per month in average from April 2020 to February 2021, against +RMB41 bn in the previous twelve months. This dynamic suddenly stopped last March. It should resume in the short term, yet without returning to the 2020 levels. Several factors account for these recent foreign investment flows: the increase in local yields and the widening spreads with US Treasury yields (yields on Chinese ten-year sovereign bonds rose from 2
According to the latest PMI numbers and economic data, growth in the Chinese economy has remained solid in the early part of Q2 2021, boosted in particular by exports. Activity in the domestic market lost a bit of steam in April, but is expected to bounce back again in the short term.
Real GDP growth reached 18.3% year-on-year in Q1 2021 and 0.6% in quarter-on-quarter seasonally-adjusted terms (according to China’s NBS). The latest activity indicators as well as our economic Pulse are strongly biased by major base effects between the first months of 2020 (when lockdown measures brought business to a standstill) and the first months of 2021.
At the end of the annual “Two Sessions”, China’s major political event, Beijing announced its economic targets for 2021 as well as the priorities of its new five-year plan. By setting this year’s real GDP growth target at simply “more than 6%”, which is lower than forecasts, the authorities are signalling that the economic recovery following the Covid-19 crisis is no longer the main focus of concern. In the short term, they will continue to cautiously tighten monetary policy and gradually scale back fiscal support measures. Above all, the authorities have affirmed their medium-term development strategy, which aims to boost innovation and drastically expand China’s technological independence.
China is the world’s second economy. It is also the world’s largest exporter of goods, a global industrial leader and a global financial player. The process of capital account liberalisation and renmimbi (RMB) internationalisation continues gradually and the opening of local asset markets to non-resident investors made rapid progress in the recent past. Meanwhile, controls over resident capital outflows remain significant.
China’s exchange rate regime is a managed float. The Chinese currency has gradually become more flexible and market-determined in recent years, but government discretion keeps significant influence on the direction of the fx rate. The RMB was included as the fifth currency in the IMF Special Drawing Rights (SDR) basket in October 2016.
Economic growth fell to 7.1% per year in 2012-2019 from 10.7% in 2002-2011. In 2020, the COVID-19 crisis demonstrated the Chinese economy’s strong capacity to absorb a major shock and rebound; real GDP returned to its pre-crisis level at the end of Q2 2020 and economic growth reached 2.3% in 2020 as a whole.
In the medium term, China’s structural slowdown is projected to continue. China continues a difficult economic transition: its investment/export-led growth model has reached its limits and far-reaching reforms are still needed to build a more balanced growth model that is more reliant on consumption and services, and less dependent on debt.
