China: Challenges to Q2 Growth

Published on April 12, 2022
SGH Insight
On Friday, April 8, nine government departments submitted their economic analysis reports to China’s State Council, inputs which will be also incorporated into the country’s aggregated National Bureau of Statistics reports due to be released on Monday, April 18.

Of the nine departments, seven estimated that China’s Q1 2022 GDP had grown by more than 5.0%, with estimates ranging from a low of 4.8% to a high of 5.4%. Notably, our understanding is that China’s foremost economic planning department, the NDRC (National Development and Reform Commission) pegged Q1 GDP growth at 5.2%, with the People’s Bank of China estimates coming in a bit lower, at 5.0%.

While the NDRC report voiced confidence that the country would achieve its growth target of “around 5.5%” this year, a view that is not shared by many private sector forecasters, it also acknowledged that the solid Q1 growth numbers – initially expected to come in as low as 4.0% — were largely due to a strong recovery in January and February.
Market Validation
Bloomberg 4/12/22

China’s better-than-expected economic data
on Monday prompted questions from analysts who pointed to
inconsistencies with alternative statistics that paint a grimmer
picture of the economy.

Gross domestic product growth rose 4.8% in the first
quarter from a year prior, the government announced Monday,
picking up from a rate of 4% in the October-to-December period,
and beating a consensus 4.2% rate among economists surveyed by
Bloomberg.

On Friday, April 8, nine government departments submitted their economic analysis reports to China’s State Council, inputs which will be also incorporated into the country’s aggregated National Bureau of Statistics reports due to be released on Monday, April 18.

Of the nine departments, seven estimated that China’s Q1 2022 GDP had grown by more than 5.0%, with estimates ranging from a low of 4.8% to a high of 5.4%. Notably, our understanding is that China’s foremost economic planning department, the NDRC (National Development and Reform Commission) pegged Q1 GDP growth at 5.2%, with the People’s Bank of China estimates coming in a bit lower, at 5.0%.

While the NDRC report voiced confidence that the country would achieve its growth target of “around 5.5%” this year, a view that is not shared by many private sector forecasters, it also acknowledged that the solid Q1 growth numbers – initially expected to come in as low as 4.0% — were largely due to a strong recovery in January and February.

For example, Retail Sales are expected to come in at 1.7% in March, compared to a 6.7% year on year growth rate in the Jan-Feb period. The ongoing Covid-19 outbreak in economically developed regions such as Shanghai and Guangdong, as well as “a complex and severe external environment,” are also seen to pose substantial risks and challenges to China’s growth in Q2.

Judging from the current economic situation, Beijing expects the April data to come in weaker than March. If Covid-19 cannot be contained this month, it will have a severe impact on consumption and the supply chain, which officials expect will reduce GDP by 1-2 percentage points in Q2 from Q1.

Beijing has thus determined that the most urgent task is to continue to firmly take its “dynamic zero-Covid” strategy to effectively curb the spread of the virus as soon as possible, and tide over the current difficulties to ensure steady economic growth in Q2.

At five meetings last week, ranging from the State Council Executive Meeting to a symposium attended by economists and entrepreneurs, China’s Premier Li Keqiang stressed the need to ensure that economic growth in Q2 is not lower than in Q1, and of the need to focus on ensuring stability, especially in April.

The domestic Covid-19 resurgences and complicated global situation, Li said, have brought greater uncertainties and challenges to the goal of stable economic performance, and governments at all levels should attempt to balance their Covid-19 response with economic and social development. Introduced policies should [be front-loaded] to produce effects early on and be intensified when appropriate.

At the Premier Office Meeting that was held on Tuesday, Premier Li said that the ongoing outbreak had dealt a major blow to micro, small and medium sized enterprises, especially those in the service sector. If the round of outbreaks in Shanghai, Guangzhou and other places cannot be contained within this month, the State Council will consider introducing macroeconomic policies like those deployed in 2020, including the use of China’s opaque but substantial emergency Premier Fund.

Li added that it was extremely important to pay close attention to the impact of the Ukraine crisis on global trade, supply chains and industrial chains through Q2 of 2022, and even through the second half of the year.

Li pushed back on Western claims that Russia will end its military operations in Ukraine by Russia’s May 9 national holiday as “unreliable and groundless.” Moscow, he said, will suspend its military operations in Ukraine only if its three stated goals are achieved.

Our understanding is that Li also told officials that Russia can better withstand a protracted war than the European Union. If the Ukraine crisis drags on into June and beyond, he warned there is likely to be an economic crisis in the European Union and a global food and energy crisis later this year.

China, he said, must study its corresponding countermeasures from now on, just in case.

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