COVID-19 continues to weaken China's growth prospects in 2022

15 December 2021

       COVID-19 continues
        to weaken China’s
     growth prospects in 2022
Tuuli Koivu | Kristian Nummelin

Many factors will continue to limit China’s growth potential next year, and
we expect that the leaders will gradually ease the policy stance to keep the
outlook stable. In 2022, Beijing could aim at 5% GDP growth.
China’s economy in a nutshell:

       •      Growth has continued to be sluggish due to three main factors: tight COVID-19
              restrictions, weak household confidence and weakness in the real estate sector.
       •      As a positive factor, the lack of electricity has eased since the end of September
              and the outlook in manufacturing has stabilised, partly due to strong export
              growth.
       •      The main message from the high-level economic policy meeting was – once
              again – stability. The Chinese media reported that growth should be at least
              5% in 2022. This implies that the gradual easing tone that we have witnessed
              recently will continue.
       •      Tight stance on COVID-19 is expected to remain in place.

Growth has stabilised
Monthly indicators show that China’s growth stabilised in October-November but at a relatively low
level. The fresh numbers on manufacturing, retail sales and fixed asset investments indicate that GDP growth
in q/q terms has accelerated towards the end of 2021 but perhaps less than expected from 0.2% Q3 2021
(read our analysis on Q3 numbers here). This implies that the stepping stone for next year’s growth is rather
low and we continue to think that there is a downside bias around the 5.3% consensus forecast on China’s
GDP growth in 2022.

There are many reasons behind the relatively weak growth momentum, and it is unlikely that the
outlook would improve dramatically very soon. Increased regulation, the deleveraging trend in the real
estate sector as well as the strict covid-19 policies have all hampered growth rates this fall and are likely to do

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so also in the coming months. For example, retail sales numbers have continued to show only sluggish growth
and numbers especially in many service sectors are weak. In addition, most real estate sector indicators are in
the red and banks’ credit growth has continued to be modest.

On a positive note, growth in manufacturing has stabilised and investment growth in the sector
continues to be robust. This has been supported by export growth, which has continued to be surprisingly
strong thanks to the strong global demand and covid-related production disruptions in many other Asian
countries competing with China. In addition, supply chains and bottlenecks do not seem to be so much of
a problem in China as they are for example in the Euro area, and also the challenges in power supply have
reportedly eased since the end of September.

There are also indicators showing that development in the real estate sector is stabilising, although
at a low level. The daily data on the real estate transactions has climbed upwards and the net increase
in medium and long-term loans to households, which we use as a proxy for mortgages, rose in November.
Thus, the downside risks concerning this sector have clearly declined although we continue to expect that its
contribution to GDP growth will be much smaller in the coming years than previously.

Gradual policy easing expected to support growth around 5% in 2022
The policy stance has been eased further, which should support the growth outlook in 2022. For
example, banks’ reserve requirement ratio (RRR) was decreased by 0.5 % points and the process to obtain a
mortgage has been straight-lined. Also the fiscal stance is becoming easier and the government bond issues
are increasing.

Regarding the policy signals, the Central Economic Work Conference continued to emphasise the
importance of economic stability in the beginning of December. The ocial numerical targets on e.g.
GDP and credit growth for 2022 may or may not be published until the March meeting, but there were
interpretations in the Chinese media that growth target should not at least be below 5%.

Taking into account the relatively weak growth prospects in the near-term, we think that a 5% growth
target would require more policy easing – both fiscal and monetary. However, the amount of easing is
likely to be limited given that the overall policy stance emphasising quality over quantity will likely continue,
and the reform of the growth model probably implies more regulatory changes, although likely at a slower
pace than we have seen this year. After all, stability will be highly appreciated by Beijing in 2022, when the
country is approaching the important Party meeting in October.

The Olympic Games in February are having much less importance for China and China’s international image
than in 2008. The main emphasis probably is to avoid any virus outbreaks.

No signs of opening up
China has continued to implement very tight covid restrictions and our baseline expectation is that
this stance will continue for the whole year 2022, but that of course depends also very much on how the
pandemic develops globally. The recent outbreak in the Zhejiang province is likely to increase supply chain
problems, and we expect to see similar disruptions in production in the coming months. The recent news
about the first Omicron case in China and the possibly low eciency of the Chinese vaccinations to tackle the

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Omicron mutation increases the worries on that front, and the recent report by the Beijing University explicitly
showed that the scale of virus cases in an environment of looser restrictions could be such that the Chinese
healthcare system simply cannot handle it. The tight policy stance is supported also by the fact that the strict
stance has wide support in China and its benefits are valued higher than the costs.

Is the CNY set to weaken?
Compared to the macro picture, the Chinese yuan has performed surprisingly well in the recent
months. In December, the RMB index climbed to the highest level since late 2015 and USD/CNY is at the
levels last seen in May 2018.

The yuan has been supported by a record high trade surplus. This eect should fade away in 2022 although
the worsening pandemic situation may continue support China’s exports at least in the coming months.
Pandemic has also depressed Chinese foreign travel, which has been positive for the yuan. As we do not see
signs of China opening up, this could give some support for the CNY also in 2022.

Regarding the financial flows, in 2021 foreign direct investments into China have been rising, but given the
increasing regulation this development may reverse and the positive eect on the CNY should be limited
in 2022. On the other hand, China’s increasing weight in many EME indices and the on-going delistings of
Chinese companies from the US stock markets may well imply more capital inflows.

The macroeconomic momentum clearly favours weaker yuan in 2022. The PBoC is tilted towards easier
monetary policy while the Fed is expected to tighten its monetary policy and the declining yield dierence
between the US and China should mean higher USD/CNY in 2022. Moreover, the recent communication from
the authorities and the hike in the FX reserve requirement hint that the PBoC will welcome CNY deprecation,
although the process will be gradual.

corporate.nordea.com/article/70870/covid-19-continues-to-weaken-chinas-growth-prospects-in-2022

Manufacturing benefits from strong export growth

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corporate.nordea.com/article/70870/covid-19-continues-to-weaken-chinas-growth-prospects-in-2022

Banks’ credit growth trends down

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corporate.nordea.com/article/70870/covid-19-continues-to-weaken-chinas-growth-prospects-in-2022

Many indicators in the real estate sector are in the red

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corporate.nordea.com/article/70870/covid-19-continues-to-weaken-chinas-growth-prospects-in-2022

More monetary policy easing is in the cards

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Trade weighted yuan has continued to perform in the recent months

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Tuuli Koivu                       Kristian Nummelin
Senior Analyst                    Economist
Tuuli.Koivu@nordea.com            Kristian.Nummelin@nordea.com
+358 9 5300 8073

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