On the other hand, the surge in global commodity prices should have only a mild impact on China’s consumer price index (CPI) and household purchasing power in the short term, thanks notably to the existence of partial controls on energy and grain prices. China can also draw on its grain reserves, which are very comfortable (at year-end 2021, it was estimated that wheat stocks could cover at least a year of local consumption). Moreover, the decline in meat prices over the past year has maintained deflationary pressures on food prices (-3.1% y/y in Q1 2022). CPI inflation was only 1.5% in March (up from 0.9% in January and February) and should be comfortably below 3% in 2022.
In contrast, producer price inflation is expected to stay high (8.7% y/y in Q1), which should strain industrial activity. Some sectors will also face supply chain problems, at least for products coming from Ukraine. China is dependent on Ukraine for supplies of corn (over 50% of its total corn imports), barley (26%) and sunflower oil (59%). Meanwhile, imports from Russia are likely to operate more normally. About half of these imports are made of oil (which accounted for 14% of China’s total oil imports in 2020). China also depends on Russia for supplies of timber (19% of total timber imports), fertilizers (22%) and industrial metals (about 7%).
Immediate mesures to boost growth
During the annual National People’s Congress meeting in early March, the authorities presented their macroeconomic goals for 2022. China’s official economic growth target, which has been set at 5.5% for 2022, seems to be very ambitious in the current environment, especially after a mixed Q1 performance (real GDP grew by 4.8% y/y, reflecting two solid months of growth followed by an abrupt slowdown in March). Policy easing, which has been underway since Q4 2021, is expected to be accelerated in the weeks ahead.
Beijing set its official budget deficit target[1] at 2.8% of GDP in 2022, down from 3.1% in 2021. This reduction does not foreshadow any fiscal tightening, but should be seen more as an indication of the authorities’ cautious approach and their determination to contain the slippage in public accounts. In fact, the government is considering major stimulus measures. They will be partly financed by the carryover of funds that were budgeted but not used in 2021.
Moreover, as is often the case in China, stimulus measures will also be covered by “government-managed funds”[2] and other quasi- and extra-budgetary funds. In its 2022 budget report, the finance minister is projecting a general budget deficit[3] of 4.7% of GDP (vs. an actual deficit of 3.8% in 2021), a government funds deficit of 3.4% (vs. 1.4% in 2021), and a consolidated budget deficit for all government bodies[4] of 7.3% (vs. 4.4% in 2021).
These figures give a more exact (but still incomplete[5]) idea of the significant size of the stimulus planned for 2022. The main measures will comprise new public infrastructure investment (especially in transport, water conservation, irrigation and digital facilities) as well as major subsidies and tax cuts notably aimed at supporting small and mid-sized enterprises and the manufacturing industry. The 2022 budget report also mentions measures to support households.
Monetary policy and credit conditions have been gradually eased since Q4 2021, via targeted measures (such as lending programmes to support SMEs, rural area development and innovation), the reduction in reserve requirement ratios (which were lowered from 12% to 11.5% in December for the large banks) and interest rate cuts.
SLIGHT EASING IN DOMESTIC CREDIT CONDITIONS Mortgage lending conditions and access to short-term financing for property developers were also eased slightly, the main goals being to help developers to complete existing development projects, reassure households and contain the crisis in the real estate sector. New interest rate cuts are expected in Q2 2022. Total social financing growth, which had slowed during the first three quarters of 2021, has barely picked up since October (chart 2).
Lastly, after months of regulatory tightening in the digital services sector, the authorities announced some policy adjustments in mid-March. This has reassured investors and might lift some of the obstacles to economic growth in 2021.
