BOFA, ANZ, China Beige Book on Covid, Slowing Growth

The Chinese economy is “struggling” for now – but it is “not in serious trouble,” said chief economist Derek Scissors at research firm China Beige Book.

“We’re not looking at an outright contraction like China suffered in 2020,” Scissors told CNBC’s “Squawk Box Asia” on Tuesday. He referred to how China’s economy saw a 6.8% year-on-year contraction in the first quarter of 2020 as the country battled Covid-19.

On Monday, China posted better-than-expected GDP growth for the first quarter of 2022, though March retail sales collapsed amid ongoing Covid lockdowns in the mainland.

“The Chinese economy is struggling, but not in serious trouble,” Scissors said, adding that Beijing is likely to prioritize public health at the moment.

“What China saw in Hong Kong, with Hong Kong doing very well against Covid until 2022 and then hitting the elderly population in Hong Kong, that’s much more important to them,” he said. “From China’s point of view, the economy is not great, but it is bearable and a nationwide Covid wave would be unbearable.”

Divided on outlook for China

Analysts are divided on the outlook for the Chinese economy as Beijing continues to pursue a strict zero-covid strategy, imposing massive lockdowns following the discovery of infections.

That is in stark contrast to the approach of many other countries, which have largely eased restrictions and shifted to a strategy of ‘living with Covid’.

According to ANZ’s Richard Yetsenga, who said the mainland continues to fight the worst Covid wave since the first outbreak in 2020.

But once that’s settled, China’s economy should be “reasonably” healthy again, said the chief economist and head of research at the Australian bank.

“There are already some signs that the government is aware of the risks here, there has been more talk about policy support,” said Yetsenga.

We are concerned that 2022 could be even more challenging than 2020…

Winnie Wue

Chinese Equity Strategist, Bank of America Securities

China kept its benchmark borrowing rate unchanged on Wednesday, with both the one-year bond prime rate and five-year LPR remaining at 3.7% and 4.6%, respectively. The majority of traders and analysts polled in a Reuters poll expected a cut in the prime rate for loans this month.

The People’s Bank of China announced Monday that it will increase financial support for industries, businesses and people affected by the pandemic.

It came after China’s central bank unexpectedly maintained a key interest rate despite expectations of more stimulus. On the same day, the PBOC also announced that on April 25 there would be a cut in the reserve requirement ratio – the amount of funds banks are required to keep in reserve.

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Yet economists at Bank of America have lowered their forecast for China’s GDP growth in 2022 from 4.8% to 4.2%. Beijing has officially set a GDP growth target of around 5.5% for 2022.

“We are concerned that 2022 could be even more challenging than 2020 for three reasons,” said Winnie Wu, China equity strategist at Bank of America Securities.

First, current lockdowns are widely spread across the mainland — unlike in 2020, when restrictions were concentrated in one province, Wu said. That has led to “broad disruptions” in transport and logistics.

Subsequently, the lingering risk of lockdowns as the world enters Covid’s third year has dampened consumers’ willingness to spend offline, she added. Uncertainty about when and how long the next lockdown will be is also starting to undermine business confidence in the longer term.

Finally, China’s export growth could take a hit as supply chains outside the country normalize as other countries reopen. Prior to the pandemic, countries like India and Vietnam had taken advantage of businesses settling there amid trade tensions between the US and China.

“The supply chain shift, once the trend starts, will be difficult to reverse,” Wu said.

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