February 24, 2022
As most of the world starts to tamp down on economic stimulus amid accelerating inflation, China appears poised to add fuel to its own economy. Its expected announcement, around March 5, of its 2022 GDP growth target is also likely to affirm China’s commitment to a structural rebalancing that prioritizes financial stability and greater wealth equality.
These seemingly contradictory signals that Vanguard expects will emerge from the forthcoming National People’s Congress, China’s annual policy proceeding, reflect a vastly changing economy trying to recover from COVID-19-related shutdowns and a downturn in a residential property sector that was once a growth engine.
It may seem remarkable that a growth target of what Vanguard expects will be in the 5% to 6% range would most likely require considerable stimulus, given China’s high-single-digit growth rates for most of the last three decades. It’s a testament to the crossroads at which China finds itself, as discussed in the 2021 Vanguard Megatrends research paper A Tale of Two Paths: The Future of China and a related commentary by Qian Wang, Vanguard's Asia-Pacific chief economist.
China has recently underscored its commitment to debt sustainability and common prosperity, increasing regulation on sectors including real estate and technology that highlight an increasing wealth gap.
“This balance in China between growth and financial stability tends to run in minicycles,” said Alexis Gray, a Vanguard senior economist who studies China. “The focus perhaps was financial stability a large part of last year. This year, growth, we think—at least in the first half—will be more of a priority.”
Comfortably reaching the growth target may require greater predictability about regulation. A Vanguard analysis suggests that the regulatory environment, as defined by both its clarity and its stringency, affects growth, said Maximilian Wieland, a Vanguard economist who focuses on China and other emerging markets economies.
“A more predictable regulatory environment through some sort of road map at the National People’s Congress will be important to the amount of monetary policy stimulus required to meet China’s growth target,” Wieland said.
Uncertainty or evidence of more restrictive regulatory policy would necessitate a 10% to 10.5% increase in 2022 in the stock of total social financing—an aggregate central bank measure of credit and liquidity—to achieve 5% growth. Greater clarity about China’s regulatory efforts and evidence of an easing of restrictions to levels seen from 2018 to 2020 would suggest that only a 9% increase in total social financing would be required.
Notes: Actual figures reflect year-on-year percentage changes in the stock of China’s total social financing, or “new” total social financing, through December 15, 2021. Forecasts are for first-quarter year-on-year percentage changes and quarterly year-on-year percentage changes for the rest of 2022 that Vanguard believes will be required for China to achieve target GDP growth.
Sources: Vanguard calculations, based on data from the People’s Bank of China, via Refinitiv. Forecasts as of February 22, 2022. Data accessed February 22, 2022.
In both regulatory scenarios, monetary policy stimulus would need to be front-loaded, the Vanguard economists said, given headwinds from slowing developed market economies and responses to the COVID-19 Omicron variant. Monetary stimulus measures also typically entail lags; stimulus introduced in the first quarter may have its intended effects only later in the year.
The likelihood of China’s hitting its GDP growth target, although not a foregone conclusion, provides insights into the economy’s likely 2022 path. As a 2020 Vanguard paper discusses, China typically hits its growth targets, though they may be smoothed out during economic upturns and downturns.1
And while most of the rest of the world is removing policy accommodations, as discussed in the Vanguard Economic and Market Outlook for 2022: Striking a Better Balance, China is likely to be adding accommodations, Gray said: “This will partially—though by no means completely—offset the tightening in developed markets.”
Also important, Wieland said, is the message that the GDP growth target announcement is likely to send: “It will tell us something about the government’s own interpretation and assessment of the secular, structural change in its economy.”
1 Wang, Qian, Ph.D.; Adam Schickling, CFA; and Beatrice Yeo, CFA. Mirage of Stability: Dissecting China’s True Growth Picture and Its Implications, 2020. Valley Forge, Pa.: The Vanguard Group, Inc.
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