Expert insight

A “policy trilemma” weighs on China’s growth

June 09, 2022

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.
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.

Contributors

Maximilian Wieland
Vanguard Information and Insights

Get Vanguard news, insights, and timely analysis on the market, delivered straight to your inbox.

Read our privacy policy to learn about how we keep personal information private.

* Indicates a required field

Vanguard Information and Insights

Thank you for subscribing to Economics & markets.

You'll be notified when new content is published, but will only ever receive one email a day from Vanguard Insights.

Vanguard logo

Vanguard is the trusted name in investing. Since our founding in 1975, we've put investors first.