Five Questions About China’s Economy in 2022
China’s annual growth target has been set at around 5.5%, which is higher than J.P. Morgan Research’s baseline assumption of a 5% floor target. The 5.5% target implies that average sequential growth will need to recover quarter-over-quarter to a 6.5% seasonally adjusted annual rate (SAAR) pace, which is above trend. This is challenging amid domestic and external uncertainties and will likely necessitate more policy support.To get more
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Fiscal policy will play a leading role. J.P. Morgan estimates a fiscal thrust at 0.8% of GDP, including a large scale of tax and fee reduction for the manufacturing sector and small businesses, fiscal transfer from central to local government and carry-over of under-utilized fiscal funds from the previous year. Meanwhile, monetary policy will likely be neutral with easing bias, with further small policy rate reduction.
China’s housing market is suffering from weakening demand. J.P. Morgan Equity Research estimates that housing demand (from household formation, urbanization, quality improvement/investment and public housing) peaked around 2017. Demand for housing is predicted to fall 47% by 2030, suggesting the current housing sector slowdown is structural and cyclical.
China’s housing sector has been a pillar of the economy, directly contributing 14-15% of GDP including construction and real estate and about 25% of GDP if also taking into account upstream and downstream sectors. The current situation is similar to the real estate slowdown of 2015 but there are also some major differences. Housing inventory is lower than in 2015, especially in low-tier cities. However, housing market fundamentals and the current policy environment suggest that a repeat of the post-2015 rebound is unlikely. Also in contrast to 2015, the M&A market has almost dried up as most developers are concerned about funding conditions.
A relaxation of mortgage policy. This aims to lift housing demand, in part by accelerating mortgage loan approvals and lowering mortgage rates 2Guidance to extend normal working capital loans to property developers. However, banks are still reluctant to do so 3Guidance to support M&A activity in the housing market. This may benefit state-owned enterprise (SOE) developers, allowing them to expand their market share. However, these measures are unlikely to ease funding stress for real estate developers quickly 4Fine-tuning in pre-sale fund management. China uses the pre-sale system, allowing developers to begin the sale process before a project’s completion. Advance payment accounts for 37% of developers’ funding, so any excessive tightening can lead to a sustained slowdown in housing market activity and more developer defaults. Recent news of uniform pre-sale fund management can help correct for excessive tightening and mitigate liquidity stress for developers 5City-level housing policy relaxation. In recent weeks, dozens of cities have announced different local policies to boost housing demand. More cities will likely follow suit in the coming months
How will the situation evolve? “We expect the property market slowdown will continue in the first half of 2022, before bottoming and stabilizing in the second half of the year,” said Haibin Zhu, Chief China Economist and Head of Greater China Economic Research at J.P. Morgan. “The liquidity and credit distress of private real estate developers may not diminish soon, leading to more defaults and possible spillovers to local government-related entities.” So far, policy adjustment is not sufficient to change housing market dynamics. Demand-side adjustments to address weak home sales are important though, including affordable housing policy measures.
J.P. Morgan Research expects full-year consumer price index (CPI) inflation to average about 1.7% year-over-year in 2022, compared to 0.9% in 2021. Annual producer price index (PPI) inflation will likely remain elevated but the trend should moderate, especially in the second half of 2022. The forecast for full-year 2022 PPI inflation is 5.2% year-over-year.
Looking at the broader picture, this suggests the wide gap between CPI and PPI seen in 2021 will narrow significantly, with easing PPI inflation and a modest pick-up in CPI inflation. This reflects the expectation that “two-speed recovery” from the pandemic, with strong manufacturing growth and sluggish service sector activity, will become more balanced going forward.
What will affect CPI inflation in 2022? Pork prices have been one of the key drivers since 2019. A high base suggests pork prices will remain a drag on annual headline CPI inflation through early 2022. On the demand side, consumer spending and service activity is expected to normalize, recovering moderately through 2022. On the supply side, there is concern that inflation drivers will rotate from supply chain bottlenecks to labor shortages and wage pressure. However, urban disposable income growth per capita is still underperforming the 7%-8% pre-pandemic annual average. Wage-push inflation pressure appears less concerning in China compared to other economies.
In terms of PPI, China saw a significant spike in 2021. A 27-year high was reached in October, with a 13.5% year-over-year increase. PPI acceleration appears to have surpassed the trend in global commodity prices, in part reflecting the near-term impact of the electricity supply shock and policy push for de-carbonization. PPI inflation has come down to 8.8% in February and is expected to further moderate with fine-tuning in the approach to de-carbonization and weakening in real estate investment. Nonetheless, the recent spike in global commodity prices due to geopolitical tension is an unexpected supply shock, and this may dramatically change the inflation dynamics depending on how it evolves. The spike in global commodity prices will have a larger impact on China’s PPI; in general, a $10 increase per barrel in oil prices would lift China’s PPI by 0.4%pt.
