Expert insight

A “policy trilemma” weighs on China’s growth

June 09, 2022

China faces a “policy trilemma”
China’s policymakers face a “policy trilemma.” They want to maintain a zero-COVID policy, maintain price and financial stability; and achieve a target for growth “around 5.5%.” But they can’t achieve all three.
Commodities exporters may feel China’s slowdown most
Our base case: Lockdowns, insufficient stimulus limit growth
In Vanguard’s baseline scenario, we foresee gradual easing of zero-COVID measures through the second quarter of 2022 and new but lighter measures in October through the end of the National Party Congress. We foresee global growth around 2.5%, down from our forecast around 4% before Russia’s invasion of Ukraine. And we foresee policymakers stepping up stimulus but still under-stimulating China’s economy with total social financing growth around 11.5%. We believe such a scenario would result in COVID-19 growth headwinds of 1.8% and external growth headwinds of 1%. With a 1% policy stimulus boost, that would leave China’s 2022 GDP growth at 3.2%, down from our forecast of 5% at the start of the year. We ascribe a 50% probability to our baseline scenario.  In Vanguard’s downside scenario, we foresee slow easing of current restrictions and a renewed COVID-19 outbreak in the third quarter of 2022. We foresee global growth around 2.5%, down from our forecast around 4% before Russia’s invasion of Ukraine. And we foresee policymakers under-stimulating China’s economy, with total social financing growth around 12%, and officially lowering their target for growth “around 5.5%.” We believe such a scenario would result in COVID-19 growth headwinds of 3.3% and external growth headwinds of 1%. With a 1.1% policy stimulus boost, that would leave China’s 2022 GDP growth at 1.8%, down from our forecast of 5% at the start of the year. We ascribe a 30% probability to our downside scenario.  In Vanguard’s upside scenario, we foresee meaningful easing of zero-COVID measures at local government levels through a more targeted approach. We foresee global growth around 2.5%, down from our forecast around 4% before Russia’s invasion of Ukraine. And we foresee policymakers not stimulating enough to reach their growth target, with total social financing growth around 13%. We believe such a scenario would result in COVID-19 growth headwinds of 1.5% and external growth headwinds of 1%. With a 1.5% policy stimulus boost, that would leave China’s 2022 GDP growth at 4%, down from our forecast of 5% at the start of the year. We ascribe a 20% probability to our upside scenario.
China likely will act to prevent further currency depreciation

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Maximilian Wieland
Vanguard Information and Insights

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