China Growth Outlook: Counting the Cost of Lockdowns

While Beijing has set an ambitious growth target this year with a generous fiscal stimulus plan, new COVID-19 waves are adding to mounting headwinds amid a slowing global economy.

After a promising start to the year, China’s economy is now facing its worst disruption since the beginning of the pandemic.

Both the manufacturing and services Purchasing Managers’ Indices (PMI) in March fell below 50 points – the level that separates growth from contraction – for the first time since February 2020. Measures to contain COVID outbreaks concentrated in Shanghai, Shenzhen and Jilin have caused sharp declines in mobility and disruption to production, further hurting consumption and services.

Domestic logistics face friction caused by movement restrictions on truck drivers, and strict pandemic controls at major Chinese ports may exacerbate global supply chain woes as port congestion worsens worldwide.

With China unlikely to give up its zero-COVID stance, we expect another month of disruption in the mainland before the situation normalizes in May. Given significant headwinds to the nation’s economic growth in the first half of this year, we have revised down our baseline GDP forecast for 2022 to mid-4%, with a wider forecast range to account for heightened uncertainties in both the Chinese and global economy.

Pressure mounts on China’s ambitious 2022 GDP growth target

At the National People’s Congress (NPC) in early March – about a week before Shenzhen’s 17.5 million residents were placed in a week-long lockdown – Beijing had announced a growth target of “about 5.5%” for 2022, beating market expectations.

Although that figure would represent China’s lowest year-on-year GDP growth in more than three decades (with the exception of 2020), it faces challenges including global geopolitical and economic uncertainty, the ongoing pandemic, a troubled domestic housing market and lacklustre consumption.

Along with the target, Beijing also revealed a fiscal stimulus plan that surprised to the upside, with tax cuts and fiscal spending on infrastructure projects the main approaches to boost growth. In spite of the lowering of China’s deficit-to-GDP ratio to 2.8% for 2022 from 3.2% in 2021 (a decrease of more than 200 billion yuan), on-budget fiscal expenditure is expected to increase by more than 2 trillion yuan compared with last year, thanks to the significant fiscal carryover from 2021.