China Growth - Withering Greenshoots?

Summary

• Calls for stepping up policy support in China are getting louder after domestic activity gauges (PMIs) slipped back into contraction territory in March.
• The consensus forecast - which incorporates the improved expectations for Q1 - is already below the official growth target of about 5.5%.
• We continue to think that “blanket” measures like cuts in the reserve requirements and policy rates are still on the table, especially if the 2022 growth forecast dives below 5%.

Evgeniya Pavlova/iStock via Getty Images

China Zero-Covid Policy and Growth

Calls for stepping up policy support in China are getting louder after domestic activity gauges (Purchasing Managers Indices (PMIs)) slipped back into contraction territory in March (see chart below). Quarterly business confidence surveys released by the central bank (PBoC) showed a similar picture, with sharp declines across the board in Q1. The downside surprises were linked to the Omicron outbreak and the resulting mobility restrictions. We might see further deterioration in April because the latest surveys have not yet reflected the month-end surge in infections.

China as Global Growth Driver

The activity slump raises three immediate questions. Question #1: What are the downside risks to China’s 2022 growth outlook? The consensus forecast - which incorporates the improved expectations for Q1 - is already below the official growth target of about 5.5%. If the lockdowns are not lifted within the next few days, we might see further near-term growth downgrades, which can push the consensus forecast below 5% (=bad “optics”). Question #2: What is the global impact of China’s local mobility restrictions? China is the only independent global growth driver in emerging markets (EM), and the fact that the Omicron surge is taking place in major ports (Shanghai, Ningbo) raises concerns about worsening supply chain disruptions and further upside inflation risks both in EM and developed markets (DM).

China Policy Support

Question #3: How much additional policy support should we expect in the coming weeks? The central bank indicated yesterday that it stands ready to dispense more counter-cyclical measures, but this statement does not look that different from previous communications, which also called for more “proactive” and “effective” policies. Unlike many of its peers, China does have room for more policy support - both on the fiscal and monetary sides - but it has so far been reluctant to deviate from the (mostly) “targeted” approach. We continue to think that “blanket” measures like cuts in the reserve requirements and policy rates are still on the table, especially if the 2022 growth forecast dives below 5%. Stay tuned!

Chart at a Glance: China Activity Gauges - Back in Contraction Zone

Source: Bloomberg LP

PMI - Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies. A reading above 50 indicates expansion, and a reading below 50 indicates contraction; ISM - Institute for Supply Management PMI: ISM releases an index based on more than 400 purchasing and supply managers surveys; both in the manufacturing and non-manufacturing industries; CPI - Consumer Price Index: an index of the variation in prices paid by typical consumers for retail goods and other items; PPI - Producer Price Index: a family of indexes that measures the average change in selling prices received by domestic producers of goods and services over time; PCE inflation - Personal Consumption Expenditures Price Index: one measure of U.S. inflation, tracking the change in prices of goods and services purchased by consumers throughout the economy; MSCI - Morgan Stanley Capital International: an American provider of equity, fixed income, hedge fund stock market indexes, and equity portfolio analysis tools; VIX - CBOE Volatility Index: an index created by the Chicago Board Options Exchange (CBOE), which shows the market's expectation of 30-day volatility. It is constructed using the implied volatilities on S&P 500 index options.; GBI-EM - JP Morgan’s Government Bond Index - Emerging Markets: comprehensive emerging market debt benchmarks that track local currency bonds issued by Emerging market governments; EMBI - JP Morgan’s Emerging Market Bond Index: JP Morgan's index of dollar-denominated sovereign bonds issued by a selection of emerging market countries; EMBIG - JP Morgan’s Emerging Market Bond Index Global: tracks total returns for traded external debt instruments in emerging markets.

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