Why China’s 2022 economic outlook is more upbeat than investors may think

China’s economy will face continuing problems from the property sector, costs from the zero-Covid strategy, slowing exports and factory closures next year
Even so, most of the headwinds are the result of conscious and presumably well-considered decisions by policymakers in Beijing

Neal Kimberley

Published: 12:30pm, 28 Dec 2021

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Beijing’s continuing zero-Covid policy comes with economic costs. Fragilities remain evident in China’s property market, a key sector of the economy. This might lead investors to adopt a downbeat attitude to China’s economy in 2022, but they could find that such a view is overly pessimistic.

Some analysts such as Lu Ting, chief China economist at Nomura, have already flagged issues they feel will restrain the pace of Chinese economic growth in early 2022.

Earlier this month, Lu argued that economic growth would slacken further next spring, adversely affected by continuing problems in the property sector, rising costs as a result of China’s zero-Covid strategy, a slowing pace of exports, and the impact of factory closures before and during the Winter Olympics in February.

This narrative will resonate with many. However, it is important to bear in mind that these headwinds are, to a large extent, the result of conscious and presumably well-considered decisions made by policymakers.

It was Beijing that decided to take measures to slow the pace of expansion in the property sector, which policymakers perceived to be increasingly unsustainable, with housing becoming increasingly unaffordable.

Beijing warned property, debt crackdown can’t ‘truly defuse economic risks’

In this sense, the “three red lines” property sector deleveraging campaign initiated in August 2020 has exposed wider frailties in this segment of the economy. This is exemplified by Evergrande Group’s travails and dovetails with President Xi Jinping’s 2017 exhortation that “houses are built to be inhabited, not for speculation”.

More recently, Beijing has taken measures to support the real estate sector. In October, Vice-Premier Liu He told a financial forum in Beijing that “reasonable capital needs” of the property sector will be met to promote healthy development of the market.

Meanwhile, in an attempt to rekindle consumer demand, regulators have encouraged lenders to provide support for the property market by easing the stringent conditions to secure home loan approvals.

Given the stress Beijing is putting on the need to pursue “stability” in 2022, these moves are logical while also sitting comfortably with Xi’s statement on housing. The actions might also make investors feel more confident that problems in China’s property sector are containable and fixable.

01:33

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With regard to the pandemic, Beijing continues to pursue a zero-Covid strategy. The northwestern city of Xian, capital of Shaanxi province, went into lockdown just last week as new Covid-19 cases were detected.

Such measures, however effective they may be in stemming the spread of the virus, come with lockdown-related downsides for the economy. It is clear that, for now at least, Beijing still thinks the benefits of its zero-Covid policy outweigh the costs.

But what is also clear is that Beijing has sought to mitigate the economic impact of such lockdowns through targeted support for businesses and consumers. This includes, for example, the People’s Bank of China’s accommodative monetary policy settings and even the distribution of large numbers of shopping vouchers by some city authorities.

As for exports, there will undoubtedly be pent-up demand for Chinese goods from Western consumers. Their inclination to go out and shop is being constrained as a consequence of societal nervousness about the spread of the Omicron variant of Covid-19 and restrictions imposed by many governments to try to limit its spread.

02:17

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That pent-up demand will surely be unleashed when Western policymakers relax those curbs, especially if medical evidence shows that, while Omicron is easily transmissible, it generally results in milder symptoms than previous variants.

Then there is the issue of the economic impact of closing factories before and during the Winter Games, set to take place from February 4 to 20 in Beijing. Again, it is undeniable that there will be economic costs associated with such closures. And, they will not be partially offset by spending from overseas spectators, as fans will not be attending because of the pandemic and associated restrictions.

However, factories in China always close for celebrations to mark the Lunar New Year. With a week of public holidays beginning on January 31 to celebrate the start of the Year of the Tiger, investors should perhaps not stress too much about the specific impact of Olympics-related factory closures.

Yes, the Chinese economy faces headwinds in early 2022. Even so, it could make more headway than might seem likely at present.

Neal Kimberley is a commentator on macroeconomics and financial markets