PICTET update on China Macro Outlook 2022: Growth Under Pressure While Policies to Turn More Supportive
China’s property sector will likely continue to decelerate in 2022, weighing on the country’s growth, although we don’t expect the property downturn to cause an outright banking crisis.
In retrospect, two downside surprises have dragged on Chinese growth in 2021 (which we expect to be 7.7% for the full year) below our initial expectations.
The first is the muted recovery in household consumption due to lingering covid threats and the Chinese government’s “zero-covid” strategy. While the strategy has proved extremely successful in preserving China’s industrial capacity, it has constrained the recovery of domestic consumption through repeated (although localised) mobility restrictions.
The other downside surprise, which has had an even bigger impact on growth, has been the massive wave of new regulations introduced since late 2020. The new regulatory regime, broadly designed to achieve “common prosperity”, has affected a wide range of sectors from consumer internet to private education, property, pharmaceuticals and so on. The resulting downturn in the property sector turned out to be the greatest drag on growth in 2021 due to the sector’s unmatched size and wide connection with the rest of the economy.
Heading into 2022, these factors will likely continue to weigh on Chinese growth, especially the property downturn. We expect Chinese growth to decline to 4.5% in 2022, the lowest rate since early 1990s except for the year of the covid shock (2020). On the positive side, policies may turn more supportive next year. While we do not expect any U-turn in the broad regulatory environment, additional harsh regulations could be more limited. Maintaining stability may return as a focus for policy makers after a year of major disruption. In addition, fiscal and monetary policies have already started to turn more supportive, as indicated by recent data releases, which could cushion the economy in 2022.
Low in 2021, consumer inflation may rise moderately in 2022 thanks to muted domestic demand. Industrial prices (PPI), on the other hand, may gradually decline after surging to a historical high in 2021 but already showing signs of peaking. This benign inflation picture would allow the People’s Bank of China (PBoC) to further ease its monetary policy in 2022, whereas other major central banks are expected to tighten.
In terms of risk, one should closely watch the development of China’s property sector, as a deeper-than-expected correction in housing prices could pose systemic risks to the financial system, although this is not our base case. And one also should watch the ongoing US-China tensions—especially around Taiwan, a dangerous flashpoint between the world’s two largest economies.
On the domestic front, the magnitude of the property slowdown and the scale of policy support remain among the biggest uncertainties facing China’s economy next year. In the case of a deeper downturn than the one we have pencilled in in our central scenario and should liquidity conditions for developers deteriorate further, the risk of broad contagion or even a hard landing for the Chinese economy will increase. China’s decarbonisation plans may cause short-term disruptions to growth as well, as was the case during the power shortages in September. On the geopolitical front, tensions between the US and China will likely remain elevated and more intricate. The recent virtual meeting between Xi Jinping and Joe Biden and high-level reengagement between the two countries on multiple fronts may suggest some marginal improvement in relations, especially on practical matters such as trade and climate policies. Nonetheless, geopolitical tensions around Taiwan have escalated significantly over the past few months. While there is still low probability of a military conflict over the island, the risk of miscalculation has definitely risen.
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