Igor Kutyaev
By Puay Yeong Goh
Mobility restrictions and housing woes will remain a drag on the country in the near term.
As China’s pandemic hangover wears on (and on), we believe the country’s economic recovery will be bumpy and subdued. We have curtailed our GDP forecasts to 3.2% from 4% for 2022, and to 4.6% from 5.3% for 2023; we also believe GDP growth will remain below 4% year-over-year heading into 2023.
China’s nascent first-quarter recovery sputtered when the new Omicron variant struck. Stringent lockdowns in April and May – part of Bejing’s zero-COVID strategy (ZCS) – drove GDP growth 2.6% lower in the second quarter versus the first. Policymakers helped lift activity in June and July by slightly moderating the ZCS and boosting infrastructure spending; however, if the experience of other Asian economies is any gauge, China’s recovery will take time, potentially playing out over several quarters.
While the impact of rolling lockdowns appears less severe – cities labeled medium-to-high risk recently accounted for 15%-30% of GDP, down from 40% in April – we believe ongoing mobility restrictions and the fear of contracting COVID-19 will continue to dissuade consumers from shopping, traveling, and dining out. Elevated unemployment, lackluster income growth, and tepid home sales will likely curb the rebound, too. Home sales rose mildly in June and July, but recent mortgage suspensions suggest that more policy action is needed.
Amidst the headwinds, the politburo effectively abandoned its 5.5% growth target for this year – though there’s been no mention of implementing additional fiscal support. We believe this suggests a low probability of extra fiscal stimulus in the near future and a higher likelihood of looser monetary policy.
We retain our cautious stance on Chinese assets and expect near-term underperformance in absence of meaningful policy support.
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