With Variables Impacting Expectations, China Needs to Get Ready for Economic Downturn

The first quarter of 2022 has come to an end in the blink of an eye. From the central government to local governments, many departments in China had hoped to achieve a good start to the economy in the first quarter this year. Economic data for the first two months of the year also led the country’s National Bureau of Statistics (NBS) officials to think that the Chinese economic recovery sees promising trend. However, the double impact of the Russia-Ukraine war and the outbreak of COVID-19 has brought great changes. From the government to the market, economic forecasts for this year will need to be revised.

The National Development and Reform Commission (NDRC) has conducted extensive examinations at the start of the second quarter. In a video conference on the economic situation of the first quarter with the local governments, experts and industry associations, the NDRC had some discussions with relevant units and professionals on the current economic performance, difficulties encountered, and measures. The Industry Department of the NDRC also held an analysis meeting with provincial Development and Reform Commission departments on the industrial economic situation. The objective of the NDRC is to evaluate the economic operation in the first quarter and plan the key work for the next.

Local Development and Reform Commission also held economic analysis forums one after another. Looking at the public reports, the local Development and Reform Commission departments are more cautious about the economic situation this year. For example, the Shaanxi Provincial Development and Reform Commission thinks that the main indicators from January to February were better than expected, but the spread of COVID-19 in many places and the complex evolution of the world situation have brought more uncertainties and challenges. The next step is to give greater priority to steady growth. The Hainan Provincial Development and Reform Commission on the other hand, believes that the economic work of Hainan province has gotten off to a good start, and the main indicators are in line with expectations. However, the complexity and difficulty of the current development environment have obviously increased. In addition to the qualitative, structural, and cyclical issues in Hainan’s economic development, the demand for stable growth continues to mount, necessitating a push for steady economic growth in the second quarter.

However, market research institutions are more cautious. Lian Ping, the chief economist of Zhixin Investment, said that although some data may have declined to varying degrees due to the rebound of the novel coronavirus outbreak in March, the economic data of the first two months were relatively good, and the economy is expected to operate within the target range of “steady growth” in the first quarter. A number of institutions have recently released their GDP forecasts for the first quarter. Overall, 13 institutions forecast the GDP growth in the first quarter to be between 4.7% and 5.4%, with an average forecast of 5.1% and a median of 5%. Some analysts are of the opinion that the second quarter of this year may be the most concentrated phase of the economic downturn pressure this year. Because the two-year average of GDP growth in the second quarter of last year was accelerated to 5.5%, the second-quarter GDP growth estimates this year will definitely be lower.

As it is difficult for the real estate market to recover in the second quarter, the impact of COVID-19 outbreak in Shanghai and other places on consumption, investment and even exports will become more apparent. GDP growth is expected to fall to 5.0% in the second quarter, or even lower.

Some important leading indicators also show that it was unlikely for the economy to get off to a good start in the first quarter of this year. The manufacturing PMI released by the NBS in March recorded 49.5, down 0.7 percentage points, the service industry business activity index was 46.7, down 3.8 percentage points and the composite PMI dropped 2.4 percentage points to 48.8. All three readings are below 50, indicating that the economic activities (manufacturing and services) were contracting. The Caixin PMI data, which is dominated by small and medium-sized enterprises, showed the same trend as the NBS’ PMI index, which is dominated by large companies. The Caixin China manufacturing PMI dropped 2.3 percentage points from February to 48.1 in March. The decline in both sectors contributed to a 6.2 percentage point decline in the Caixin China Composite PMI to 43.9 in March, the lowest since March 2020, indicating that the enterprises’ production and business activities were contracted once again due to the recent surge in the pandemic. The Caixin services PMI dropped 8.2 percentage points to 42 in March from 50.2 in February, indicating a significant contraction in the service sector activities. Companies generally reported that the tightening of COVID-19 prevention measures in March affected business activities and reduced customer demand.

Looking at the microeconomic phenomena from the market level, it further confirms the leading indicators that show economic downturn pressure. Since the beginning of this year, local novel coronavirus outbreaks have occurred in Shenzhen, Jilin, Shanghai and other places, resulting in strict control policies to be implemented in these places under the target of “dynamic zeroing”. With this, logistics, transportation, travel and other activities have been greatly affected. Yangtze River Delta, Northeast, Pearl River Delta, North China and other different areas have shown various degrees of logistics obstructions. In some areas, trucks and drivers were even stuck on highways for a week. Even in Beijing, which is less impacted by the current round of prevention and control measures, the commercial service industry has also been greatly affected. Due to the continuing impact of the pandemic, a large number of shops in some formerly prosperous central business areas have been closed, and local business depression can clearly be seen.

Shanghai, as China’s major international centers of economy, finance, trade and shipping, is still under the impact of the pandemic. Official reports showed more than 90,000 positive cases have been reported in Shanghai since March, including 3,245 confirmed cases and 87,586 asymptomatic cases. Although there have been no deaths in Shanghai for this current outbreak, more than 38,000 medical workers from 15 provinces have been dispatched to aid the city at the moment. As Shanghai is still in the midst of a tense battle against the virus, it is difficult to assess the impact on its economy for the time being. However, what is certain is that Shanghai, as China’s largest central economic city and a leading city in the Yangtze River Delta region, will bear a very high economic cost under the impact of this outbreak. Shanghai is the heart of the entire country, the hiccups in Shanghai’s economy mean the entire country will be disturbed.

Overall, China’s economy in 2022 should exhibit a quarterly growth pattern of “high to low” outlook and accomplish the aim of steady economic development in general, in accordance with the base and trend of China’s economic growth in 2021. However, under the influence of the two new variables, the repeated impact of the pandemic since February and the Russia-Ukraine war, the country’s economy will face an overall worsening development environment this year. This year is politically important for China. The Central Economic Work Conference at the end of last year set the priority task of stabilizing the economic growth, which is an important political task. However, under the influence of the new variables, China’s steady economic growth this year has become far from optimistic. Local governments should not only forgo expectations of a successful start but also be prepared to face the difficulties of the economic slump in the face of such adversity. In terms of market demand for policies, the domestic market may ask for more approaches to stabilize growth, as well as additional requirements for proactive fiscal policies and easing tools in monetary policies in the future.

He Jun
He Jun
Mr. He Jun takes the roles as Partner, Director of China Macro-Economic Research Team and Senior Researcher. His research field covers China’s macro-economy, energy industry and public policy