Will China come to the world’s aid?

China conked out for the most part last year as an engine of economic growth. This year, in the face of heightened macroeconomic and geopolitical risks, the world economy could really use a reliable support pillar. However, it is questionable whether China can resume playing this role because the country faces challenges of its own.

Irresolute giant

Will China come to the world’s aid? This question arises in a double sense at the moment. One sense regards the armed conflict in Ukraine. The Middle Kingdom could take on a role as a mediator here between Russia and Ukraine, but has held back thus far on pursuing greater diplomatic engagement. The other sense regards global economic activity. In the face of macroeconomic risks and elevated uncertainty, the world’s second-largest national economy could potentially play a supportive role here this year, as it has more than once in the past.

We are hardly in a position to judge whether China is capable of contributing to cooling down the worst geopolitical hotspot in recent decades because it is difficult to assess what foreign and economic policy priorities Xi Jinping and the Chinese Communist Party are pursuing. An answer to the question regarding economic growth is a bit easier to formulate, albeit likewise with reservations.

In a growth trough
An acceleration is urgently needed

Economic growth in China

Sources: Bloomberg, Kaiser Partner Privatbank

Signs of stabilization and risks

One thing is certain: After year-over-year economic growth in China slumped to a historic low (not counting the coronavirus contraction) of +4% in the fourth quarter of 2021, an acceleration in growth is now urgently needed. Macro data points recently released are in fact showing signs of a stabilization. Chinese industrial output, for example, jumped 7.5% year-on-year in January and February (December: +4.3%), plant and equipment spending surged 12.2% (December: +4.9%), and investment in infrastructure rose 8.6% (December: +0.2%). Those numbers all surpassed analysts’ consensus estimates, accordingly causing the economic surprise index for China to turn sharply upward.

However, the economic picture in China actually isn’t as robust as it seems at first glance because stiff headwinds are blowing from at least two directions. One headwind is the downturn in China’s real estate sector, which is not over yet. The financial state of Chinese property developers has tended to further deteriorate lately while demand for real estate remains very weak. The volume of private mortgages to finance home purchases fell in February for the first time since that statistic started being officially tracked in 2007. Consumer spending in the broader sense poses the second risk to growth. The new wave of COVID-19 infections and the resulting lockdowns in megalopolises like Shenzhen and Shanghai will likely keep a damper on consumers’ shopping desires for the time being. Consumer sentiment, in any case, has already dimmed significantly.

Macro data points have been surprising on the upside…
…but are painting an overly optimistic picture

Economic surprise index for China

Sources: Bloomberg, Kaiser Partner Privatbank

More likely a (half-inflated) lifesaver

Chinese government officials have probably recognized that sentiment needs to be turned around and that it would be better for economic activity to shift a gear higher soon. Stability (and reasonably content public sentiment) is needed – whatever the cost – in the runup to the 20th Party Congress in autumn, where President Xi looks set to be reelected to a third term in office. Against this backdrop, the only thing surprising about the 2022 GDP growth target of +5.5% proclaimed at the National People’s Congress in March is that it is very ambitious and well above the consensus forecast.

Some government officials have already taken a rhetorical lead in connection with the declared growth ambitions. Be it measures aimed at bolstering economic activity (e.g. via tax refunds and tax cuts), moves to ease pressure on the real estate sector or a reversion back to policies designed to stimulate the market in the private sector (thus also to the benefit of tech companies), there has been no shortage of announcements in recent weeks. Those words are now likely to be followed up by (even more) actions in the second quarter. There are plenty of suitable control levers to adjust. In addition to loosening some regulatory screw(s), further interest-rate cuts by the People’s Bank of China and vigorous fiscal stimulus also belong in the repertory. A great deal of money for fiscal support is already in place for 2022 because local governments in China have the authority to carry over funding from 2021 to the current year. Even China’s climate ambitions are unlikely to stand in the way of the “stabilization” goal in this special year. The government accordingly did not state any explicit decarbonization or energy consumption reduction targets at the National People’s Congress.

Back to stirring with a giant ladle?
The government of China is serving up another round of economic stimulus

China’s credit impulse

Sources: Bloomberg, Kaiser Partner Privatbank

In the balancing act between necessary reforms and the need for stability, the pendulum in China looks set to swing back in the opposite direction in the months ahead. This should result in a bit less regulation and a bit more growth. However, walking a tightrope between those two poles will become increasingly more difficult for China’s national economy as its size (and its disequilibriums) grow larger. Despite all of the efforts to stimulate economic activity, growth of +5.5% hardly seems achievable from today’s perspective. So, here’s our answer to the growth question posed at the outset of this article: although China is unlikely to act as a brake on growth this year, we would not view the country as a lifebuoy for the world economy.