WILL CHINA’S ECONOMY REBOUND AS COVID LOCKDOWNS ARE LIFTED?

22.08.2022 As China emerges from the widespread Covid lockdowns of the Spring we look at the outlook for the world’s second largest economy and the implications for global financial markets.

During the Spring, as Covid lockdowns proliferated, the Chinese economy slowed dramatically. However, as these restrictive measures have been gradually eased over the Summer the economy has rebounded. Nevertheless, due to the ability of the Covid virus to mutate into different variants, the possibility that there will be further lockdowns in the future remains. This is because China’s zero Covid policy increasingly differs from the West’s herd immunity strategy. The Chinese policy relies upon mass testing, heavy use of centralised quarantine facilities, lock downs and closure of non-essential businesses. The reasons for this draconian approach are less developed healthcare facilities, lower vaccination rates amongst the elderly and a less effective domestic vaccination programme.

The other key drag on Chinese economic growth, at present, is the real estate development sector. A series of defaults, by high profile developers, has meant that the finance to complete projects is now much harder to come by. As a result, activity, particularly in the less economically important cities, has largely ground to a halt. In recent years property development has contributed around one quarter of Chinese economic growth.

The outlook for the Chinese economy, for the rest of the year, is one of modest growth. Overall economic growth for 2022 is likely to be around 2 percent versus a government target of 5.5 percent. However, the possibility of an intensification of the credit crunch in the real estate sector suggests the risks to growth in 2022 are to the downside.

As the Chinese manufacturing sector emerges from the Covid lockdowns there is evidence that, some of the supply chain problems that emerged in 2021, are starting to moderate. With demand, in advanced economies, also weakening manufactured goods price inflation should start to slow. More generally a slow growing Chinese economy should also limit the price appreciation of key commodities such as oil and copper. Overall this should exert downward pressure on inflation in advanced economies. In the current market environment this will be advantageous for both bonds and equities.

For information only. Investors should seek professional advice for their own circumstances before making an investment.

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This post was written by Robin