China’s Economic Outlook: COVID Impedes GDP Growth

COVID-19’s resurgence in China has cast doubt over the government’s ability to meet its 2022 growth target of around 5.5%, which officials affirmed in March, before the scale of the latest outbreak became clear. Because of the outbreak, we have lowered our 2022 China growth forecast to 5%.

But the situation is fluid, and the latest growth forecasts may be overtaken if the outbreak worsens. The next two months will be important in providing clarity on the economic impact and government actions.

Until then, we’re adhering to three key assumptions: first, that the government still has a strong desire to achieve its growth target; second, that its policy response will be sufficiently robust and timely; and third, that the outbreak will be brought under control in time for activity to recover strongly for the rest of the year.

China Is Still Pro-Growth

After the Chinese government intervened last year to rein in what they regarded as excesses in the technology, private education and housing sectors, many investors formed the view that the government had de-emphasized growth as a policy objective. But we see that as a misreading of the situation. Although the government has moved beyond simple growth to multiple objectives, growth remains very important, as demonstrated by the strong target set in March.

Many investors, however, questioned the government’s ability and determination to achieve the target, and the latest outbreak (Display) has intensified bearish sentiment.

An important feature of China’s political system is that maintaining the growth target is necessary to incentivize local governments. At its April meeting, the Politburo—the chief decision-making body of the Chinese Communist Party—sent a very strong pro-growth message while acknowledging the challenges facing the economy. It pledged, for example, to “increase the strength of macro policy and strive to achieve economic goals” and to “plan for incremental policy tools” in a timely way.