Overview

• China’s economy grew by 8.1% in 2021 – marginally stronger than our forecast of 8.0%. By quarter, year-on-year growth peaked in Q1 at double digit rates (driven by base effects related to the initial COVID-19 outbreak) before trending lower over subsequent quarters.
• The outlook for China’s economy has considerable uncertainty – particularly related to the impact of the Omicron variant of COVID-19 and the policy responses (including public health, fiscal and monetary policies) of authorities. We have trimmed our forecast for the full year to 5.8% (previously 6.0%) – with stronger growth expected in the second half of the year. Our forecast for 2023 is unchanged at 5.7%.
• China’s industrial output continued to recover in December – increasing by 4.3% yoy (from 3.8% yoy previously). Despite this pickup, growth in industrial production remains historically weak – reflecting a broad range of factors, including the impact of COVID-19 outbreaks, price pressures, shortages of key inputs and apparent weakness in domestic demand.
• Real fixed asset investment continued to contract in December, down by 5.2% yoy, however this was less negative than the 12.0% decline in November. There is a stark contrast between the strength of investment in manufacturing to the declines in real estate.
• China’s trade surplus surged to an all time high in December – up to US$94.5 billion (from US$71.7 billion in November). This increase reflected a strong month-on-month increase in exports (which also recorded a record high), while imports eased marginally.
• Real retail sales contracted in December, down by 0.5% yoy (compared with a 0.5% yoy increase in November). This was the first fall since August 2020, and well below pre-COVID-19 trends.
• In mid-December, the People’s Bank of China (PBoC) cut its primary policy rate, the Loan Prime Rate (LPR) by 5 basis points to 3.8%, the first rate change since April 2020. This followed the early December cut to the Reserve Requirement Ratio, which expanded banks capacity to lend. In mid-January, the PBoC cut its medium term lending facility (MLF) rate by 10 basis points – which is likely to lead to another LPR cut later this month.
• That said, these modest cuts to interest rates are unlikely to provide a substantial boost to the economy, but send a signal to firms that authorities are seeking to provide support in a slowing environment. We have argued that rate rises in advanced economies in 2022 limit the capacity of the PBoC to substantially cut policy rates – as this may result in capital outflow as well as weaken the currency (which could increase pressure on Chinese firms with US dollar denominated borrowings). As a result, fiscal stimulus may need to provide a greater share of the overall policy support.

For further details, please see China’s economy at a glance (January 2022)