Many countries, particularly in the developed world, are now looking at an economic slowdown ahead in the face of policy tightening by central banks to reign in high inflation. The US Fed, after hiking policy rates by 300bps since March, reiterated reducing inflation will need further policy tightening and that it will involve a sustained period of below-trend economic growth. The ECB, after hiking 75bps this month, said it is still far away from the rate that will help return inflation to 2% and thus it will take further hikes in the next several meetings.
China, on the other hand, has been facing several domestic economic issues since 2021 – a property sector meltdown which started with the payment default by a major property developer, power crunch due to coal shortage last year, multiple and extensive lockdowns as part of its Zero Covid Strategy and the recent power rationing as a severe drought impacted hydropower generation. As policy tightening by developed market central banks continue to take centerstage, is the Chinese slowdown the elephant in the room? In this note, we look at the nature and extent of this slowdown through ten key charts.
Consumer has thus been impacted severely due to wealth erosion, dim income growth prospects and multiple severe Covid-related lockdowns.
Apart from the cut to RRR and 5-year LPR, China has also announced additional quota for policy banks (to channel targeted loans) & local government special bonds. It has also renewed its focus on the time-tested mode of infrastructure investment. However, policy response so far has been more incremental in nature than big-bang.
Given global demand and trade is likely to slow, China’s exports will most likely moderate in addition to the already slow growth driver of private consumption. Given monetary policy in the rest of the world is getting tighter, it is difficult to see China easing in a big way. Fiscal policy is also partly constrained due to the property sector slowdown as a good part of revenue, particularly for the local governments, are from land sales to property developers. Targeted fiscal measures, for the property sector or households, could still be the key although Zero Covid Strategy that China has persisted with poses uncertainty.
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