2022-05-13-KPMG_China-中国经济观察_2022年二季度_25页_1mb

China Economic Monitor: Q2 2022 Summary

Overview

• GDP Growth: China's real GDP growth was 4.8% year-on-year in Q1 2022, exceeding market expectations but lower than the two-year average. The highly transmissible Omicron variant led to stricter lockdowns and mobility restrictions, weighing on economic growth in Q2.

Industrial Production

• Growth solid in Q1, with high-tech and equipment manufacturing outperforming overall growth.
• Supply chain disruptions from Omicron have caused challenges, including reduced industrial capacity utilization (falling to 75.8% in March) and halted factory operations.

Retail and Services

• Domestic consumption remains weak; retail sales saw their first contraction since August 2020 in March, hit by pandemic-related restrictions.
• Household sentiment cautious: surveys indicate lower planned consumption and investment despite slight improvements in income outlook.

Investment

• Manufacturing & Infrastructure: Robust growth with double-digit increases.
• Real Estate: Market under pressure, with new home sales falling 13.8% in Q1 and investment stagnant. Local governments eased regulations but the overall tone remains anti-speculation.

Fiscal and Monetary Policy

• Fiscal: Issuance of RMB 1.3 trillion in local government special bonds, supporting infrastructure.
• Monetary: Reduced the required reserve ratio (RRR) by 25bps to inject liquidity and increased support for SMEs, green investments, and tech sectors. Lowered MLF and LPR rates in early 2022.

Global Context

• Global economic growth expected to slow (IMF revised 2022 forecast to 3.6%). Inflation pressures mount with Fed accelerating tightening.
• Emerging trade tensions and disruptions affect China's exports and logistics, though pre-April performance was strong.

Foreign Investment and Exchange Rate

• Foreign direct investment (FDI) increased by 25.6% in Q1, with strong inflows into high-tech sectors.
• RMB faces depreciation pressure, especially against the USD, amid divergent monetary policies with the US.

Other Highlights

• Unemployment rose slightly in March, reflecting ongoing labor market challenges.
• Real estate market continues slow; further easing policies possible but "housing for living" principle is expected to stay.
• Contact tracing through travel permits; supply chain issues caused port congestion in areas like Shanghai and Ningbo.

Conclusion

• The government aims for a 5.5% GDP growth target amid ongoing pandemic challenges.
• Expect policy further steps, infrastructure investment increases, and continued pressure on real estate and vulnerable economic sectors.
• Resilience may be seen in exports and high-tech industries, but domestic consumption and labor markets remain areas of concern.