Customers at a Shake Shack restaurant in Shanghai on June 29. Lingering Covid-19 restrictions are making recovery more challenging for the service sector. Photo: Bloomberg
by Sylvia Sheng
by Sylvia Sheng

China’s economy set to rebound as pandemic risks ease

  • With inflation unlikely to constrain further policy easing, economic growth is set to recover gradually in the second half of 2022
  • Chinese stocks are well positioned to continue to outperform equity markets in the rest of the world

Despite being only halfway through the year, 2022 already seems set to be a remarkable one. Inflation in many developed-market economies is at multi-decade highs, while the S&P 500 had the worst start to the year in half a century.

Amid the volatile market environment, the resilience of Chinese equities is notable. China’s benchmark CSI 300 Index has rallied about 10 per cent in the past month. It is one of the few major equity markets to have recorded a positive return in that period, outperforming both developed- and emerging-market equities.

Chinese equities look better positioned in the current global macro environment, given more favourable growth and policy cycles than the rest of the world. The core problem across developed economies is elevated inflation rates.

In the United States, for example, core consumer price inflation was running at 6 per cent year on year in May, well above the US Federal Reserve’s target of 2 per cent. Euro-zone inflation has also accelerated in recent months.
Central banks are tightening monetary policy in the face of these pressures. To successfully contain inflation, they must cool aggregate demand, which means a slower pace of growth. As a result, caution is warranted on the outlook for developed economies as they are likely to experience a period of sluggish growth.
In contrast, inflation is not a prevailing issue in China as core inflation remains below 1 per cent. As such, it is unlikely to constrain further policy easing. China’s economic growth is likely to recover in the second half of 2022, helped by strong policy support and the fading impact of the Covid-19 pandemic.
Policy easing has been ramped up on the monetary, fiscal and property fronts in recent months. There have also been positive developments on technology regulation, including the issuance of a second batch of gaming licences, which suggests we may be past the peak of regulatory tightening.
While the magnitude of policy easing introduced so far is modest compared with in the past, the frequency of recent announcements suggests policymakers are increasingly concerned about the risks to growth.
Fiscal policy is likely to be the key focus in the near term. Beijing has long turned to fiscal support for infrastructure investment as an important lever to stabilise the economy. The strength and pace of infrastructure stimulus will be central for China’s growth recovery in the coming months.
Fiscal funding is important to monitor the progress of infrastructure stimulus. So far, weaker-than-expected fiscal revenue and land sales because of the pandemic and ongoing property downturn are weighing on funding for infrastructure investment from the state budget.

China orders U$120 billion infrastructure push amid slowing economy

So we should expect policymakers to lean more on the government-run policy banks to fill the funding gap. Premier Li Keqiang recently announced an 800 billion yuan (US$119.4 billion) additional quota for policy bank lending specifically designated for infrastructure investment.

As Covid-19 restrictions have eased amid falling case counts, the Chinese economy has taken the first steps towards recovery. Stronger-than-expected May activity suggests growth momentum bottomed out in April as the country moved past the worst of the pandemic-induced economic drag.
China’s recovery is likely to be led by a resumption of production and supply chain normalisation, followed by a recovery in consumption demand. This would be consistent with the experience of Shenzhen, one of the first major cities in China to reopen after an Omicron-driven lockdown in March.


Shenzhen’s “slow life” Covid-19 fight an evolving pandemic strategy from mainland China?

Shenzhen’s “slow life” Covid-19 fight an evolving pandemic strategy from mainland China?
High-frequency indicators show that intracity traffic and truck flows recovered in around two weeks to pre-lockdown levels as the city reopened. However, lingering Covid-19 restrictions have made it more challenging for service-sector consumption – such as in-restaurant dining and going to cinemas – to recover.
Overall, we should expect a more gradual recovery in the second half of the year, compared with the V-shaped recovery in spring 2020. The unsynchronised lockdowns across major cities are likely to lead to a staggered reopening process, limiting the speed of the rebound.

Moreover, China is unlikely to enjoy the same tailwind from global goods demand and a buoyant domestic property sector that it did in 2020. Uncertainties about the virus and the “zero-Covid” policy are also likely to weigh on sentiment.

While slowing global growth will constrain the extent of China’s rebound, the expected recovery is a distinctly different path from weakening growth elsewhere. The divergence in policy and growth cycles between China and the rest of the world is likely to underpin Chinese equities’ continued outperformance, relatively speaking, in the coming months.

Sylvia Sheng is a global multi-asset strategist at JP Morgan Asset Management