We are kickstarting 2022 with short conversations with some of our regular contributors about their outlook for the new year.
Here, we speak with Louis Kuijs, Head of Asia Economics at Oxford Economics, about the outlook for the Chinese economy in 2022, and spillovers on other Asian economies.
Unravel: What is your outlook for the Chinese economy in 2022?
Louis Kuijs: China’s economy is likely to face continued downward pressures to grow from an ongoing property downturn and a zero-COVID tolerance approach that impedes consumption, but policy easing should dampen the overall slowdown in 2022 to around 5%, from 8% in 2021.
The real estate slowdown that started in 2020 has been amplified by a tightening of property sector regulatory and credit policies and Evergrande’s problems. The downturn is likely to continue into the first half of 2022, with property investment falling significantly on the year, before anxiety over developer defaults diminishes and a modest recovery takes hold.
The measures and restrictions used as part of China’s zero tolerance approach to COVID weigh on consumption, especially of services, directly (by restricting people’s mobility) and indirectly (by curbing sentiment). The government is likely to remain particularly conservative until the end of the Winter Olympics. Some easing of domestic COVID restrictions is likely from the second quarter onwards, supported by widespread distribution of booster shots, which should improve consumption momentum. However, China is unlikely to move to a COVID containment approach until later in 2022 at the earliest, and this stance will continue to weigh on household spending in 2022.
Policy easing is on its way though, and will provide a floor until overall growth. Responding to the downward pressures on growth, policymakers have started to signal a shift in the policy stance towards supporting growth. Monetary policy is likely to be accommodative in 2022, with ample liquidity in the interbank market and credit growth of around 10%, implying an increase in leverage and an improved credit impulse. I also expect an easing of property-sector policies and some relaxation of fiscal policy after the tightening in 2021, with an increase in the overall government deficit.
Unravel: Do you expect China to continue engaging with the global economy, or retreating inward somewhat in terms of focusing on domestic demand and consumption?
Mr Kuijs: I think China will maintain gradual progress with reforms to raise productivity and rebalance the economy. I also expect China to continue to open up more, with more steps to lower import tariffs, ease capital flows and open up more sectors to foreign investment.
However, China is likely to maintain its state-led economic model, with the state guiding economic development, including via industrial policy; a strong role for state-owned enterprises (SOEs); and insistence on “adherence to Party leadership” by all. Many foreign governments and companies will remain unhappy about this state-led model and call for changes in economic policy towards lower subsidies, a proper separation between the state and business, competitive neutrality and a level playing field for firms other than SOEs.
Nonetheless, developments in recent years indicate that most governments and companies remain intent on engaging economically with China, even as some ‘decoupling’ and adjustment of supply chains away from China takes place because of diversification as well as geopolitical and security considerations.
Meanwhile, there is so far little evidence of China turning inwards economically. Imports used in the country’s own economy have broadly continued to grow in line with its domestic demand. And I don’t expect things to change much on this front, given the steps to open up further. However, US restrictions on access to technology are leading China to double down on technological self-reliance. This should result in more spending on R&D and investment in high-tech sectors, notably semiconductors and high-end manufacturing.
Unravel: Do you expect the US-China trade war to continue, or to peter out?
Mr Kuijs: The Biden administration is maintaining a tough stance on China, in part reflecting an unfavourable opinion of the country across the US political spectrum. Meanwhile, as discussed, China is pursuing a political and economic model that is quite different from the US. As a result, the overall setting for US-China relations is likely to remain tense, as is underscored by the recent addition of Chinese companies to the lists maintained by the US government to restrict US exports and investment. In all, the climate is not conducive for tariff reductions.
But the US’ China policy has become decidedly more predictable under the Biden administration, and the risk that the friction escalates has come down. Meanwhile, many US firms remain keen to expand their China business. Also, despite calls for decoupling from China by politicians, most US importers show little urgency in switching to other sources for their imports of goods. Indeed, after an initial hit following the imposition of import tariffs by the Trump administration, China’s exports to the US have performed remarkably well.
The result is neither an escalation of the trade war nor a resolution. The most likely scenario in 2022 is a continuation of the status quo, with tense overall relations between the two countries but economic relations weakening a little. Having said that, the strained relations do imply economic and financial risks.
Unravel: What are going to be the two or three defining economic themes playing out in Asia in 2022?
Mr Kuijs: First, economic growth in the Asia region should be relatively strong in 2022. I expect most Asian economies to grow faster in 2022 than in 2021, which is in contrast to expectations for the US, Eurozone and Latin America. To a large extent, this expected improvement will reflect the unwinding of the generally disappointing performance this year when the region was hit harder by the Delta-variant wave of the pandemic than the other major regions. Good progress on vaccination in the second half of 2021 and a move in several economies towards a ‘living with COVID’ stance are leading to the relaxation of restrictions. Meanwhile, relatively favourable foreign and domestic demand conditions should support recoveries.
Second, supply-side constraints on global trade will lessen in intensity through 2022. While normalising consumer spending and service sector activity will be key drivers of growth across the region, external demand will also remain very important. This year, export volumes have generally struggled to make significant progress after a strong first quarter, as severe supply-side problems, such as shortages of key parts (most notably semiconductors, particularly those used in cars), a lack of shipping containers, port congestion and a wide variety of other logistics issues, led to a stagnation in global trade and unfulfilled demand. Going forward, these supply problems should gradually ease over the next year. Indeed, there are tentative signs that the supply chain crisis may be losing some of its intensity, with semiconductor sales having picked up over recent months and automakers expecting an end-year production upturn after a dreadful third quarter.
Louis leads the Asia-Pacific macro team and its research. He contributes to S&P Global Ratings’ macro-credit narrative and represents the firm in events, conferences, and the media, delivering its insights and thought leadership to the marketplace. Before joining S&P Global Ratings in 2022, Louis held senior positions in both the public and private sectors, including at the International Monetary Fund (IMF) in Washington DC, the World Bank in Beijing, and at the Royal Bank of Scotland and Oxford Economics in Hong Kong. While with the World Bank, he led the China Quarterly Update, headed the Bank’s mid-term review of China’s 11th Five Year Plan, and led research on China’s saving and investment, rebalancing, and long-term growth and structural change.