China is facing the worst outbreaks of COVID-19 since the first quarter of 2020. As authorities continue to follow a zero-COVID policy, provinces summing up to nearly 25% of national GDP have been under partial or full lockdown in March-April. This compares with 18% during the worst week of 2021 (in August) and 63% during the worst 20 days of 2020 (over January- February). The impact on mobility is visible: National mobility has dropped by -10% year-on-year (y/y) in the first half of April – though this is roughly half the size of the shock observed in February-March 2020. High-frequency data (see Exhibit 1) show traffic congestion was down by -1.6% y/y on average in Q1 2022, -6.8% in March and -10% in the first half of April. Assuming a return-to-normal from May, Q2 2022 mobility would drop by -1.7% y/y, compared to the -17.7% drop seen in Q1 2020 (-21.3% in February-March 2020) and -3.7% in August 2021.
Exhibit 1: China traffic congestion index * (100 = Chinese New Year)
In this context, we are revising our 2022 GDP growth forecast for China to +4.6%, down from +4.9% expected a month ago, and +5.2% expected in January (see Exhibit 2). Activity data released this week show a resilient headline Q1 2022 GDP (at +4.8% y/y from +4.0% in Q1 2021) but mask the fact that March was much weaker than January-February, with a clear omicron-related shock on consumption (retail sales contracted by -3.5% y/y in March, after +6.7% in the first two months of the year). For the rest of 2022, in our new central scenario, we assume that the lockdown in Shanghai will last for a month and that mobility at the national level will return to a range more in line with pre-pandemic conditions in May. This would imply that omicron outbreaks year-to-date will have cost 0.4 percentage points (pp) of GDP growth in 2022. Our estimate is aligned with recent academic research, which finds that the city of Shanghai being under a full-scale lockdown for a month will knock 2.7% of China’s aggregate income – an impact of -0.2pp on yearly growth. In a downside scenario where the Shanghai lockdown lasts for two months, and other large cities are also affected, China’s 2022 GDP growth would slow to +3.8%. In a worst-case scenario where the Q1 2020 shock is repeated, China would grow by only +1.3% this year.
Exhibit 2: 2022 China GDP growth forecast (%)
Further policy support will only partly compensate for the shock to domestic demand. After a year of tightening, the policy mix quickly reversed to easing mode from Q4 2021. Since the beginning of this year, both fiscal and monetary policies have been relaxed, with tax cuts, larger public spending, a more dovish stance on the property market and policy rate cuts. Such policy support has resulted in a recovery in the credit impulse (see Figure 3), which remains in negative territory as of March but is clearly on a rising trend. The most recent move is the People’s Bank of China (PBOC) announcing a cut to the reserve requirement ratio (RRR) for all banks by 25bp (with an additional 25bp cut for selective smaller banks), effective from 25 April.
Going forward, we continue to expect one more cut in the policy rate (-10bp to the one-year medium-term lending facility (MLF) rate) in Q2 2022. In line with the comprehensive guidelines released by the PBOC on 18 April, we expect the central bank will increase liquidity provision and enable a continued recovery of credit growth throughout the year, in part by relaxing macroprudential measures related to the real estate sector and local government financing vehicles. Lending programmes targeted to specific sectors or types of companies (for example, SMEs, high-technology, transportation sector, etc) will also be stepped up. Further rate cuts are not to be ruled out in H2, especially if the economic situation deteriorates more than currently anticipated. The PBOC is wary of the risk of inflationary pressures, but they remain limited for now and are unlikely to become an obstacle against further monetary easing, with core inflation likely to remain low, given the weak private consumption expected in 2022. On the fiscal side, along with tax and fee cuts for companies, additional public investment of c.3% of GDP is planned in 2022. It is most likely to be front-loaded in Q2 to at least partly compensate for the COVID-19 shock to domestic demand, and leave room for additional stimulus in H2 if needed.
Exhibit 3: China credit impulse and breakdown
The larger-than-expected Omicron-shock is exacerbating the growth mix of the Chinese economy, where private consumption and real estate investment lag and manufacturing and infrastructure investment are tailwinds, a story we had expected for long. Our revisions to China’s 2022 economic outlook thus concern not only headline GDP growth but also the breakdown (see Exhibit 4).
Exhibit 4: China GDP growth and contribution breakdown
The growth contribution from private consumption is expected at just 1.6pp in 2022, compared with 3.7pp in 2021 and 3.1pp on average in the 2010s. Investment is likely to contribute by 1.3pp (compared with 3.3pp on average in the 2010s), pressured by a real estate sector that remains weak. Government consumption should contribute to GDP growth by 1.6pp in 2022, up from 1.4pp in 2021 and on average in the 2010s. Finally, while before the pandemic they tended to constitute a weight on overall growth (-0.2pp contribution in the 2010s), net exports are expected to contribute positively again in 2022 (0.2pp after 1.7pp in 2021 and 0.6pp in 2020), as both exports and imports should grow at a slower pace this year. That said, risks to China’s exports performance is on the downside, as US-China tensions never really disappeared. President Biden’s administration could decide on potential import quotas on Chinese products, in a politically sensitive context in both countries (US mid-term election and 20th Party Congress in China in November) and as the invasion of Ukraine could fuel fresh decoupling momentum.
Françoise joined Allianz Trade in 2019 as a senior economist for Asia-Pacific. Prior to this, Françoise worked as an Economist for over five years at the equity broker Exane BNP Paribas in London. There, she was in charge of the macroeconomic analysis of the Chinese economy and Emerging Markets. She also worked on global and European topical themes. Her other work experiences include the ACPR, the French supervisor for the banking and insurance sectors.
Ano Kuhanathan has held various positions in the financial industry in trading, research and consulting. He was the Eurozone economist at Axa Investment Managers from 2016 to 2018. Before joining Allianz Trade in 2020, he was the head of economic advisory and advanced analytics at EY Advisory. Ano regularly teaches economics, sustainable finance and applied data science at Neoma Business School.
Pablo Espinosa Uriel
Pablo Espinosa Uriel joined Allianz SE in 2020 as the capital markets analyst for emerging economies, where additionally he collaborates with the alternative investments team. Prior to this, he worked in the financial industry as a consultant, and as an economic assistant in various research institutes.