Overview

• In stark contrast to the more relaxed public health policy of advanced economies, China is persisting with policies frequently described as “zero COVID”, which are causing significant economic disruptions following outbreaks. The lower efficacy of domestic vaccines, a weaker healthcare system and a lack of political opposition to these policies means that we expect them to continue for some time (most likely until mRNA vaccination is widespread in China). This means the risk of further Shanghai-style lockdowns remains – implying downside risk to our forecasts and further disruption to already impaired global supply chains. We now expect China’s economy to grow by 4.2% in 2022 (from 5.0% previously) and 5.6% in 2023 (from 5.4% previously).
• China’s industrial production contracted year-on-year in April – down by 2.9% yoy. PMI surveys highlighted a range of challenges on both the demand side (with new orders weak) and supply side – where production declined, as well as rising input costs and supplier delivery times expanding. Similarly, real fixed asset investment contracted by 3.5% yoy (from a 1.0% yoy increase previously).
• China’s trade surplus was marginally stronger in April – edging up to US$51.1 billion (from US$47.4 billion in March). Recent months have seen the trade surplus retreat from the peaks of late 2021, but it remains high by historical standards. Growth in both export and import values slowed considerably in April, which given the large scale increases in trade prices in recent times, implies that trade volumes contracted – in part reflecting the impact of various COVID-19 measures (including the lockdown in Shanghai).
• Retail sales fell sharply in April – reflecting the impact of various COVID-19 lockdowns and measures on consumer demand. Retail price inflation also accelerated in April, meaning that real retail sales fell by 14.0% yoy – compared with a 6.1% yoy decrease previously. This was the largest contraction since the first quarter of 2020.
• Over the first four months of the year, total new credit issuance increased by 6.8% yoy to RMB 13.0 trillion. While bank lending accounts for the largest share of this lending, it contracted over this period – down by 5.9% yoy to RMB 8.8 trillion. This decline was driven by the weakness in April, with bank lending rising by 5.2% yoy in Q1 2022. In contrast, government bond issuance rose by 91% yoy over the first four months.
• The People’s Bank of China has suggested it intends to step up monetary support, without specifying the tools it is seeking to use, while also noting it aims to keep the exchange rate essentially stable. Since the start of April, the CNY has depreciated by over 5.6% against the US dollar, while the yield on 10 year US Treasuries has exceeded that of China’s 10 year government bond since early April. With the Federal Reserve set to lift rates significantly across the remainder of this year (with the risk of further increases in 2023 as well), continued monetary policy imbalance risks capital outflows that could destabilise China’s financial sector.

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