INSIGHT

JANUARY 2022

China economic focus January

2022: what to look for this year
China economic focus January 2022: what to look for this year

The Chinese economy is facing more challenges in 2022 from both internal and external markets. We’ve identified four areas to
watch from the macroeconomic perspective.

1. Balancing growth
Economic slowdown carries over in 2022. The Chinese economy grew by 8.1% in 2021 from a low base of 2.2% in 2020, but
headwinds intensified in the second half of last year. GDP slowed from 7.9% year-on-year in Q2 to 4.9% and 4% in Q3 and Q4,
respectively. We forecast China’s GDP growth at 5.4% in 2022.

Some of the headwinds are beginning to ease: namely, the power shortages and “dual control” energy policy that forced
industrial sectors to cut production. Easing credit, stimulating investment and de-risking the property market requires careful
management. But China’s stringent measures to contain the pandemic remain a risk to mobility and household consumption.

Support growth with investment. We expect the Chinese government will continue to support the domestic market. With
uncertainty in the export market mounting and domestic consumption deteriorating, a stronger push on investment in 2022 is
likely.

Bring forward infrastructure projects. China will expedite the implementation of major projects included in the 14th five-year
plan, focusing on critical sectors such as food and energy security, the advanced manufacturing and high-tech industries,
logistics and telecommunications, and social housing. At the Central Economic Working Conference in December, the
government relaxed the qualification of infrastructure projects to hasten the start of new projects. Furthermore, the government
has asked local governments to expedite the construction of infrastructure projects by utilising the RMB1.2 trillion of special-
purpose bonds issued in Q4 2021 and accelerating the issuance of the 2022 bond quota.

De-risk the property market. With a greater policy emphasis on stability, China’s property policies will ease marginally in 2022
for primary housing demand. Debt risks have elevated since the default of China Evergrande last September, but property
market credit had started to ease by the end of last year. Loans issued to developers and home buyers have expedited and we
believe this trend will continue in 2022. While China’s property market faces some challenges ahead, we are not expecting a
collapse. It must be stressed that curbing speculative demand is still high on the policy agenda. And slowing urbanisation means
that pressure on sales, investment and new starts remains.

Monetary easing. The government is loosening monetary policy amid macroeconomic challenges. China’s central bank cut the
medium-term lending facility interest rate by 10 basis points this month, which consequently brought down borrowing rates to
companies and households from commercial banks. This is after lowering the reserve requirement ratio in December, which
released RMB1.2 trillion to the market. After the rather disappointing Q4 2021 result was announced in mid-January, the central
bank has indicated it will further relax monetary policy in 2022.

2. Accelerate energy transition in a more rational way

China’s policy push towards its energy consumption and carbon emission targets in the 14th five-year plan period (2021-25) will
become more reasonable in 2022. The country’s one-size-fits-all dual control policy has led to additional disruptions to
manufacturing activity on top of the impact of power shortages, dampening economic growth in H2 2021.

Adapt dual control policy to different energy sources. To relieve economic pressure and achieve its energy targets at the
same time, the Chinese government has altered its policy. Incremental renewable energy has been exempted from the
accounting of total energy consumption since December. This policy will encourage the building, production and offtake of
renewable energy compared to before when energy consumption from all sources was capped by the dual control targets.

Power price pressure for energy-intensive sectors. In various local governments’ 2022 guidelines, power prices for peak
hours have been increased by more than 50% from the base power price during non-peak hours. The base power price has
been decided by the market since the power price liberalisation in October. This measure will limit power consumption among

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China economic focus January 2022: what to look for this year

energy-intensive industries through increasing their power cost, and prevent a hard stop of operations for all industrial sectors
towards the end of every quarter.

In addition, we also expect the government to apply more stringent industrial policy on energy-intensive sectors in 2022. In the
14th five-year plan for the raw materials industry released in December, the government outlines that the capacity for bulk
commodities such as crude steel and cement will not increase in the current five-year period. Under this guideline, we could
expect the production caps or export controls on energy-intensive sectors such as steel, aluminium, refined oils and cement to
continue this year.

3. Covid restrictions depress domestic consumption

China’s zero-tolerance strategy against Covid-19 is impacting domestic consumption. After the arrival of the more transmissible
Delta and Omicron variants, indicators for private consumption (see retail sales chart in the appendix) and travelling deteriorated
significantly in Q4 2021.

Passenger turnover has been lower than 2020 level since August 2021

Covid restrictions to remain tight through 2022. Ahead of two high-profile events – the Winter Olympics and Paralympics in
February and March, and the 20th Party Congress in November – China is expected to elevate restrictions, regardless of the
cost. However, negative feedback on the economy has emerged: restrictions limit consumption, lower consumption reduces
income, and lower income further reduces consumption.

Will economic pressure force China to soften its zero-tolerance policy? We think it is possible if the economic slowdown
from domestic demand persists and external demand weakens. The population’s support for China’s tight restrictions could be
tested. Watch for the government sending out a more optimistic tone on the virus from its official media, signalling domestic
restrictions could be lifted within a few months. But the removal of border controls will take longer.

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China economic focus January 2022: what to look for this year

4. International relations and trade complicate

Political tensions may impact economic activity. China’s international relations are facing challenges in 2022. The trend in
recent years has seen differences in ideology between China and Western society increasingly taking centre stage over
collaborations in economic activity. The diplomatic boycott of the Beijing Olympics by the US, Australia, UK and Canada, and
Beijing’s potential retaliation raises concern that it could develop into trade and investment disputes.

In China’s most in-focused international relations with the US and Australia, both sides show little willingness to give up their
current political stance. As such, we expect bilateral controls in key industries, such as the US ban on exports of
semiconductors to China, and China’s ban on Australian coal imports, to persist in 2022.

China’s exports will slow with uncertainties from the US-China trade deal. The phase one trade deal that ended on 6
January 2022 has been rather ineffective. Higher tariffs and China’s US$200 billion purchase commitment did not serve the US’
purpose to reduce China’s trade surplus in the past two years. To the contrary, the trade surplus increased by 7% and 25% in
2020 and 2021, respectively. Higher tariffs drove up import costs for companies and consumers in the US even more as they
increased imports from China, adding to cost pressures from constraints in supply chains. We believe that the possibility of
lower tariffs between US and China is increasing from an economic perspective. However, the political stance of the two
countries means that the domestic market could push back if Biden's administration steps back on the trade terms.

China’s trade surplus against the US

Even with a potentially lower tariffs between China and the US from the new deal, China’s exports to the world will moderate
from 30% growth last year. Key drivers for external demand, including pent-up demand from developed economies and
disruptions in the global supply chain ex-China will ease this year.

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China economic focus January 2022: what to look for this year

Appendix
Wood Mackenzie’s proprietary China data

Unit Vintage 2020 2021 2022 2023

GDP 2010 US$ Bn Q4 2021 11,785 12,748 13,438 14,131
GDP growth year-on-year Q4 2021 2.3% 8.1% 5.4% 5.2%
IP index year-on-year Q4 2021 2.8% 8.6% 5.0% 4.5%
Exchange rate US$/RMB Q4 2021 6.90 6.48 6.66 6.49
Urban building completion year-on-year H2 2021 -4.0% 4.6% 2.9% -0.5%
Source: Wood Mackenzie, NBS

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China economic focus January 2022: what to look for this year

PMI IP and retail sales

Trade Inflation

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China economic focus January 2022: what to look for this year

Property Investment

Money supply Required reserve ratio

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