Battling headwinds to realize growth goal

China set an ambitious GDP growth target of 5.5 percent for 2022 at the annual session of the National People's Congress in March. The target is broadly in line with our (Standard Chartered Bank's) forecast of 5.3 percent growth.

The Chinese economy had a robust start to the year, with accelerating growth across industrial production, retail sales and manufacturing investment (driven by strong gains in industrial profits last year). Infrastructure investment growth, too, picked up, signaling stronger government support.

However, the outlook is cloudy amid new headwinds from surging commodity prices and the latest COVID-19 outbreaks, arguably the worst China has faced since February 2020.

Our analysis shows that a contained economic slowdown in Russia will have a limited impact on China's economy, as only 0.4 percent of China's GDP is driven by demand from Russia. However, the drag could multiply if the Russia-Ukraine conflict results in a broader slowdown in global demand, which is responsible for 15 percent of China's GDP.

While uncertainty remains, we think the impact of the current COVID-19 resurgence is likely to exceed that in the third quarter of 2021, when economic activity fell to 1.9 percent below trend from 0.1 percent above trend in the second quarter－equivalent to a 0.5-percentage-point reduction in annual GDP growth.

That said, the current COVID-19 wave should have a much milder impact than the one in the first quarter of 2020, which caused a 3-percentage-point reduction in annual GDP growth, not least because China's vaccination rate has increased substantially since April 2021, with over 3.2 billion doses administered, equivalent to 2.3 times the total population. In addition, companies and consumers in China have become experienced at maintaining business continuity amid new COVID-19 cases.

We expect China's current account surplus to narrow from 1.8 percent in 2021 to 0.9 percent of GDP in 2022, driven by rising commodity prices and easing global demand. China is heavily dependent on crude oil imports, which amounted to 37 percent of its annual trade surplus in 2021. In other words, all else being constant, a 10 percent increase in oil prices will reduce China's trade surplus by 3.7 percent.

Faced with new headwinds and geopolitical uncertainty, China has pledged to front-load stimulus and improve its efficacy in 2022. And we think a combination of further monetary easing and fiscal expansion is needed to achieve this year's growth target.

We maintain our forecast of another 10 basis points cut in the medium-term lending facility rate in the second quarter of this year, given that Premier Li Keqiang called for a further lowering of corporate funding costs at the NPC session in March. The People's Bank of China, China's central bank, announced on Friday it will cut the reserve requirement ratio for financial institutions starting from April 25 to support the real economy.

While the People's Bank of China has a range of tools at its disposal to boost market liquidity, including the planned transfer of 1 trillion yuan ($157.03 billion) of profits to the central budget to finance tax refunds, we think a near-term RRR cut would send a clear signal of stronger monetary support at a time of significant downside pressures.

We expect M2(money supply from all sources) and total social financing growth to be 9-10 percent and 10-11 percent, respectively, in 2022, in line with our nominal GDP growth estimate of 8-9 percent.

Also, we do not think inflation will be an obstacle to monetary policy easing. Unlike in many other economies, consumer price index (CPI) inflation has been largely absent in China, averaging only 0.9 percent in the first two months of 2022. This reflects sluggish consumer spending and low pass-through from rising commodity costs to consumer goods prices.

As such, we keep our 2022 CPI inflation forecast unchanged at 2.2 percent, well below the official target of around 3 percent.

In contrast, China's producer price index (PPI) inflation has been greatly affected by rising commodity prices, so we recently raised our 2022 PPI inflation forecast from 3.5 percent to 6.0 percent.

Moreover, we expect the fiscal impulse to turn positive in 2022, and the planned broad budget deficit (including the general deficit, local special bonds and carryover funds) to be equivalent to 6.9 percent of GDP, higher than the actual outcome of 5.2 percent in 2021.

Therefore, the government may need to fully implement the budget to achieve its 5.5 percent GDP growth target amid rising headwinds. In fact, local government officials have been asked to shoulder the responsibility of promoting growth, which should incentivize them to use the entire fiscal space available.

And we expect a fully implemented budget to result in a fiscal impulse of 1.7 percent of GDP in 2022, lifting annual GDP growth by 0.9 percentage points.

The views don't necessarily reflect those of China Daily.

The author is a senior economist with Standard Chartered Bank.