Senior market strategist APAC Chi Lo discusses how Beijing has shifted to a pro-growth policy and away from painful economic restructuring as growth momentum slows to levels below what is tolerable to Chinese policymakers.
Structural policies such as striving for greater common prosperity and reducing carbon emissions are likely to be implemented far less aggressively than in 2020 and 2021.
Beijing has also reportedly already handed out RMB1.46 trillion in special local government bond quota. That is at least 40% of the estimated total. The funds raised are to be deployed in early 2022 to boost aggregate demand.
The People’s Bank of China (PBoC) will contribute to the efforts to safeguard growth with further monetary easing, especially for the strategic and green development sectors that are high on Beijing’s priority agenda.
Local governments will lean towards pro-growth policies in 2022 when having to choose between stabilising growth and containing debt levels as the former is now a political priority.
With further easing and more special bond issuance on the cards, credit growth should turn up in early 2022. The PBoC has already cut the reserve requirement ratios for banks twice by a total of 100bp since July 2021. Together with selective cuts in the rates on its lending facilities, including the mid-term lending facility (MLF) and the loan prime rate (LPR), monetary policy has started to stabilise the credit impulse and aggregate credit growth.
In policy statements in December 2021, the Central Economic Work Conference said clearly that stabilising GDP growth would be the top priority for 2022. Policymakers are channelling liquidity to priority investments in developing the green economy, climate control, reducing carbon emissions, new energy, high tech and high value-added manufacturing.
The sharp slowdown in the property sector (Exhibit 1) due to policy tightening has resulted in rising defaults, raising market risk aversion and aggravating credit default risk. The initial pace of the correction was aggressive and disruptive. However, assertive and quick policy reactions by the authorities have helped avert a systemic crisis, showing that Beijing has both the skills and tools to contain any crisis.
The authorities have taken further action to prevent any credit seizure from arising by urging banks to increase development loans and lifting onshore bonds and restrictions on issuing asset-backed securities. Local governments in hard-hit cities have eased restrictions on access by developers to presales proceeds, which are a crucial funding source.
We believe China’s banking system is strong enough to deal with an increase in delinquencies in the property and construction sectors. 
The International Monetary Fund has estimated that Chinese banks had an average tier-1 capital ratio of 12% in Q1 2021 (the latest data available). This suggests that the system has a large cushion for potential shocks, making the risk of a property market crash pulling the rug from under the economy manageable. The market should have discounted this by now.
Under the renewed pro-growth efforts, Beijing is expected to loosen its aggressive targets to reduce energy intensity and consumption. This relaxation should ease any constraints on growth. It has already shown flexibility by lifting the restrictions on coal production when energy shortages disrupted production and supply chains and hurt GDP growth in late 2021 (Exhibit 2).
China has shifted its policy on decarbonisation to an ‘investment before retrenchment’ framework from the earlier ‘decarbonisation by brute force’ approach. From now on, the carbon-reduction campaign will ramp up investment in alternative energy sources first before moving away from traditional energy sources, notably coal, to minimise any energy shortages.
Major short-term risks
The two main risks to growth are fading export growth and new mutations of the coronavirus.
China’s robust export growth since mid-2020 has been a direct result of its ‘zero Covid policy’ (ZCP). This has allowed China’s production to normalise quickly to cater for global demand at a time when production in the rest of the world was hamstrung. 
When production and consumption is normalised in the rest of the world, Chinese exports growth will likely weaken, translating into weaker GDP growth, ceteris paribus.
Omicron and any other evolving virus strains with greater transmissibility suggest that China’s ZCP will remain in place for longer. If China has to step up its containment measures, including selective shutdowns and border closures, consumption and the services sector (which accounts for over 50% of GDP) will face severe disruption.
Meanwhile, it is unclear by how much another Covid outbreak in developed markets would boost the consumption of stay-at-home goods from China. Such demand may have been largely satiated by now.
 See ‘Chi Time: Credit Events in China (II) – Will the Property Market Come Crumbling Down?” 22 October 2021.
 See “Chi Time: China’s Zero-Covid Policy – Timing, Benefits, Costs and Impact”, 24 November 2021.