China: Growth, Stimulus, and A-Shares

Published on January 3, 2022
SGH Insight
Monetary policy in 2022 will be “prudent, flexible, and appropriate and give full play to both the aggregate and structural functions of monetary policy tools.”

The PBoC will become more proactive in bumping up support for the real economy. Monetary policy will be targeted to further beef up support for high-tech, small, and micro businesses, green development, and other key areas and weak links of the economy.

On the aggregate side, the PBoC will leverage multiple tools to keep liquidity reasonably ample, “strengthen the stability” of credit growth, and reduce the financing costs of enterprises while keeping it all at “an overall stable” level. The PBoC will also actively ramp up structural policy support.

Beijing’s aim is for new loans to reach about 20 trillion yuan in 2022. Officials continue to support expectations that the bank reserve ratio will be cut by another 0.5 percentage points in Q1, and if truly needed, the PBoC will not rule out lowering the one-year loan prime rate (LPR) rate in the next few months.
Market Validation
Bloomberg 1/4/22

PBOC Adopts New Loan Tools to Support Smaller Firms

China’s central bank adopts a new loan
support tool for smaller businesses from Jan. 1 through June
2023 to boost lending to smaller businesses, according to a
statement on PBOC website Jan. 1.
* PBOC will encourage local banks to increase loans to smaller
firms and cut costs, in order to ensure employment and stabilize
the economy

Economic officials in Beijing believe China will grow by more than 8.0% in 2021 and note that this growth has come “against a backdrop of a US continuous crackdown and stranglehold on China.”

Looking to a more challenging 2022, they see China facing the triple pressures of “demand contraction, supply shocks, and weakening expectations” in the economy, while facing what they see as the huge test of a more severe, complex, and uncertain external environment.

All Focus on Q1 GDP

Sources continue to stress Q1 of 2022 as the key to ensuring China’s economy can grow above 5.0% or even 5.5% year on year in 2022.

At present, the top priority for governments from the central to local levels is to ensure stable economic growth, and a series of macroeconomic policies and measures will be introduced to stabilize economic growth specifically for Q1. Our understanding is that the goal of the State Council is to achieve economic growth of around 4.0% year on year in Q1.

If Beijing can manage a GDP growth rate of around 4.0% in Q1, it not only means that China’s GDP would likely reach 5.0% or more in 2022, but also that China’s “economic aggregate” would reach 120 trillion yuan in 2022, an increase of about 10 trillion yuan from 2021.

However, already cautious officials point to the challenge of even meeting the base effects of the 18.3 % GDP growth rate of 2021 Q1 and warn that it is not going to be easy to achieve their target of 4.0% year on year growth for Q1 of 2022.

The State Council will send 28 inspection teams and working groups to all 31 provincial-level regions from January 4 to inspect and guide the current economic work and sent 16 inspection teams already to locals between December 15 and 29.

Monetary Policy and Financial Regulation  

Monetary policy in 2022 will be “prudent, flexible, and appropriate and give full play to both the aggregate and structural functions of monetary policy tools.”

The PBoC will become more proactive in bumping up support for the real economy. Monetary policy will be targeted to further beef up support for high-tech, small, and micro businesses, green development, and other key areas and weak links of the economy.

On the aggregate side, the PBoC will leverage multiple tools to keep liquidity reasonably ample, “strengthen the stability” of credit growth, and reduce the financing costs of enterprises while keeping it all at “an overall stable” level. The PBoC will also actively ramp up structural policy support.

Beijing’s aim is for new loans to reach about 20 trillion yuan in 2022. Officials continue to support expectations that the bank reserve ratio will be cut by another 0.5 percentage points in Q1, and if truly needed, the PBoC will not rule out lowering the one-year loan prime rate (LPR) rate in the next few months.

A-Shares

While the drive for stability will continue to feature high among China’s monetary policy goals in 2022, financial regulators will make the efforts around these “more targeted” over the next five to six months “so that market liquidity remains reasonably sufficient.”

After a bad 2021, officials are eager to talk up good news for the country’s capital markets, including the provision of ample liquidity, and point to internal estimates that approximately 3.3-3.5 trillion yuan of capital will flow into A shares in 2022, 1.2-1.4 trillion yuan more than in 2021.

Complete adoption of the “registration-based IPO mechanism” will be a focus of the CSRC (China Securities Regulatory Commission) in 2022, as per the Central Economic Work Conference vows “to make more reform and progress in 2022.”

Officials in Beijing eagerly note that although the A-share market “fluctuated quite a bit” in 2021, investors, especially overseas investors, are going in with a positive outlook for 2022 in anticipation of the further possible easing of monetary and fiscal policies.

They helpfully remind that the A-share market’s price-to-earnings ratio is below 20−not only much lower than the reading in the United States and the global average, but lower than China’s historic market peak.

Not mentioned is that Chinese market underperformance has been not least of all due to Beijing’s own self-inflicted policy reasons, other than an oblique reference to “certain deep-seated institutional problems and impediments from vested interests becoming increasingly evident in deepening reform and opening up.”

The CSRC predicts that companies listed on the A-Share market through IPOs and the funds raised will hit a record high in 2022: the number of IPOs on the A-share market will exceed 700 and the funds raised they expect will reach about 700 billion yuan.

For reference, according to the CSRC, a total of 523 companies were listed on the Chinese A-share market in 2021, up 20% year on year from 2020, and the proceeds raised went up by 13% from a year ago to reach 543.6 billion yuan.

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