Monthly update on Asia & China Market: How to turn the economy around?

  • 26 April 2022 (5 min read)

In this video, our Senior Emerging Asia Economist Aidan Yao discusses three questions:

  • What is happening in the China economy?
  • What needs to be done to turn the economy around?
  • What is our outlook on China’s growth?

Full transcript:

Hello, welcome to our monthly video. My name is Aidan Yao. I’m the senior emerging Asia economist at AXA IM.

The Chinese economy is in a precarious position, plagued by a vicious COVID flare-up and elevated external uncertainties. Accelerated equity market selling and RMB depreciation, on the back of capital outflows, suggest that global investors are getting worried about the economy amidst the worst outbreak since the start of the pandemic.

What is happening in the economy?

Sequential growth slowed notably in March, with retail sales and services activity contracting for the first time since Q1-2020. And this is before Shanghai’s lockdown went into full swing, sending shock waves across the nation’s logistics and supply chains. With nearly a quarter of the economy now under various degrees of COVID controls, the economic outlook is growing bleaker by the day.

What needs to be done to turn the economy around?

Drastic actions are, therefore, needed to pull the economy back from a cliff. We think Beijing needs to urgently undertake two sets of policy changes.

First, the COVID management has to move away from a heavy reliance on draconian administrative controls to one that puts more emphasis on vaccines, self-testing, home quarantine, and treating for the vulnerable. It won’t be a full liberalisation straightaway due to public-health and political considerations, but a middle-of-the-road approach – between ‘zero COIVD’ and ‘living with COVID’ – to better balance virus control and growth stabilisation. These changes can take place even with the overall name of strategy ‘the dynamic Zero COVID’ staying the same. 

Second, besides relaxing COVID restrictions, macro policy supports need to step up to more effectively stimulate the economy. Policy easing has quickened in recent weeks, but still fall far short of what’s required to counter the stiffened growth headwinds. Hence, more policy supports, and implemented in better coordination with COVID policy changes, are needed to revive the economy once the current outbreak is brought under control.

What is our outlook on China’s growth?

To reflect the greater COVID shock and the underwhelming policy actions so far, we have lowered our 2022’s growth forecast to 4.5% from 5%. Importantly, the revised projection imbeds the urgent policy adjustments as described above. Failure to achieve them could see economic growth fall further towards, or even below, 4% this year.

Thank you very much and stay safe.

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