Caixin analysis: What to expect of China’s economy in 2022
After a bumpy ride in 2021, China enters an important year ahead, both politically and economically. Following is our take on emerging trends, key issues and potential surprises for the country in 2022.
The lengthy statement from the Central Economic Work Conference (CEWC) that concluded on Dec. 10 became the most widely dissected document of this turbulent year, with every word and phrase heavily scrutinized.
In describing the real estate market, why was achieving a “virtuous cycle” put before “healthy development,” a placement that differs from the Dec. 6 Politburo meeting statement? Why was the phrase “houses are for living in, not speculation” mentioned by the CEWC but not the Politburo?
The only thing certain is that growth will be the top priority in 2022. This can be seen in the CEWC’s statement, which said “taking economic development as the central task is the requirement of the Party’s basic line.” That quote last appeared in the July 2015 Politburo meeting, when the Chinese economy was also floundering.
“Stability” was mentioned 25 times in the statement, clearly highlighting it as the paramount goal before the party’s 20th National Congress later in 2022.
But what does this mean?
First, macro policies will be more supportive as per the CEWC statement, which said that “policies could be preemptive.” This suggests a forward-thinking approach, doing much more rather than too little. On monetary policy, we see cuts to required reserve ratios and more quantitative policies.
Fiscal policy has been a drag on growth in 2020 because of a contraction due to unwinding from the 2019 fiscal stimulus. In addition, fiscal outlay has been slow. Some estimates point to 1.8 trillion yuan ($283 billion) in unspent money to be rolled over to 2022. That is why the CEWC wants to “accelerate the process of spending.”
Investment could be the primary growth driver. Strong exports were the main driver in 2021 — a result of the surprisingly slower resumption of global production due to multiple waves of COVID-19. It is almost certain that exports will not be as strong going forward, hence either investment or consumption has to pick up the slack. Consumption is stable and slow to recover, while “forward-thinking” infrastructure investment will be encouraged.
As for fiscal outlays, policymakers want to avoid “flooding” the market with too much credit, which is always a challenge when growth is preferred. As the CEWC statement notes, policies need to be precise, targeted and structured to help small businesses, innovation sectors and green industries. The central bank has been rolling out special programs for each of the three, and we will see more in 2022.
But the bigger question lies in how much is too much. Sector-specific measures and what local governments do often matter more than comparatively abstract macro policies.
Next, we see restrictions on the property market further easing. Long-time watchers know that when the term “specific policies for specific cities” reappears — as it does this time — it usually marks a turning point. Local governments will now likely be able to adjust their restrictions on homebuyer qualifications and financing.
The principle of “houses are for living in,” however, will prevail with the bottom line being that no developer is too big to fail. Some believe the recent turmoil in the real estate market could have finally shattered the idea that home prices always rise. So the property market in 2022 is not likely to get too hot.
Then there is the phasing out of coal, which will be pursued more pragmatically. Representatives at the meeting conceded that coal is China’s main energy supply and should be replaced with sufficiently large renewable energy sources.
With lessons learned from the power shortage and factory shutdown debacles, policymakers want to improve “dual-control” targets, which put a lid on total and per-unit GDP energy consumption. As the ratio of renewable energy in total consumption keeps rising, it is only natural to substitute restrictions on energy consumption with those on carbon emissions. However, since accurately measuring carbon emissions has been a reach up to now, a temporary compromise is to maintain dual-control targets, but exclude consumption in renewable energy and the raw materials used in its production.
Lastly, controlling massive capital remains critical in 2022. The CEWC meeting promised to establish “traffic lights” for investments, strengthen supervision, and prevent reckless capital expansion. The new system – along with the upcoming rules on overseas listings with a variable interest entity structure – is supposed to clarify investor guidance.
All told, the CEWC statement marks a turning point, shifting from risk reduction to protecting growth. There is clearly some reflection or “soul searching” among the regulators, who are encouraged to learn more about economics and technology, and have gained a broader view beyond their own jobs and the importance of coordinating actions with others.
But that shift also accompanies new risks. Three of them are worth noting.
First is policy overreaction that leads to flooding the market with credit, eventually building up asset bubbles, financial risks and inflation. Second is the impact of the implementation of new rules regarding data security, personal information protection, anti-trust activities and labor protection. All are well intended, but the devil lies in the details.
Finally, the job market will likely face strong headwinds in 2022.
Author: Caixin, NIKKEI Asia