Economic growth in 2022: China is off to a surprisingly good start, but it may not last

Retail sales rose 6.7% in the first two months of 2022 from a year ago, according to data released Tuesday by the National Bureau of Statistics (NBS). That was well above the estimated 3% increase in a Reuters poll of economists.

Industrial production jumped 7.5% over the same period, beating forecasts of 3.9%. And investment in fixed assets, such as infrastructure and machinery, jumped 12.2% from a year earlier.

“Under the combined effect of macroeconomic policies and business efforts, the momentum of China’s economic recovery improved in January and February, laying a solid foundation for a strong start to the first quarter of this year,” Fu said. Linghui, spokesperson. for the NBS, at a press conference in Beijing on Tuesday.

On the political plan, China has has dramatically increased its infrastructure spending, with many local governments launching large projects in areas such as electric mobility and semiconductors, Fu added.

Data on Tuesday showed investment in the manufacturing sector jumped 21% in January and February from a year ago, much faster than the 13.5% year-on-year growth recorded during the same period in 2021.

This is not the first time this year that the Chinese authorities have underlined the importance of infrastructure spending. Earlier this month, Chinese Premier Li Keqiang said the government will increase fiscal and monetary support for the economy this year, including spend more on infrastructure and cut interest rates further.

The government has increased the overall budget deficit this year, implying growth in infrastructure investment, Larry Hu, chief economist for Greater China at Macquarie Group, wrote in a report on Tuesday.

However, experts warn that multiple challenges loom on the horizon, including Covid and the war in Ukraine.

China's new Covid lockdowns are another threat to the economy

Worst Covid-19 surge in two years

China is battling its worst Covid surge since the initial outbreak in Wuhan in early 2020.

“With authorities abandoning targeted containment measures in favor of wholesale shutdowns, this has the potential to be even more disruptive than last summer’s Delta wave, which led to a sharp contraction in economic output,” wrote Julian Evans-Pritchard, senior China economist for Capital Economics, on Tuesday.

Even the government acknowledges that further Covid outbreaks could weigh on the economy in the coming months.

“The recent spread of the coronavirus in many parts of the country may further restrict consumption, and the consumption base is still not solid,” Fu said. “Sporadic epidemics in some regions will also affect industrial growth.”

China reported 5,154 locally transmitted cases on Monday, the highest number in two years, according to the National Health Commission (NHC).

To contain the spread of the virus, authorities have taken strict measures in several cities and placed tens of millions of people under various forms of confinement.

Apple supplier Foxconn halts operations in Shenzhen as China locks down tech center

The southern city of Shenzhen, which borders Hong Kong, has imposed a week-long lockdown since Monday. All businesses – except those deemed essential or engaged in supplying Hong Kong – have suspended operations or implemented work-from-home policies. The city is home to Chinese tech giants Huawei and Tencent.

Apart from Shenzhen, local authorities in the northeastern province of Jilin have banned residents from leaving or traveling since Monday. The province, which has a population of 24 million, is home to the industrial hub of Changchun, where Toyota (MT) and volkswagen (VLKAF) run their car factories in partnership with state-owned automaker FAW Group.

Shanghai, the country’s biggest business hub, also imposed strict measures after a spike in Covid cases, closing schools and cinemas and restricting movement around the city.

“Indeed, Covid-19 is the biggest uncertainty this year,” said Macquarie Group’s Hu.

He predicts that China will grow by 4% in running trimester. For 2022, he expects the world’s second-largest economy to grow by 5%, below the government’s target.

Earlier this month, Premier Li set China’s economic growth target at around 5.5% for 2022, the lowest official target in decades.

Inflationary pressure due to the Ukrainian crisis

Chinese growth could be even more affected by the war in Ukraine.

Russia’s invasion of its neighbor is driving up commodity prices and upending the global economy, at a time when policymakers are already racing to get high inflation under control.

NBS’s Fu said the direct impact of tensions in Europe on China is “limited”. because its trade exposure to Russia and Ukraine is “low”.

But he said the impact on global commodity prices is “obvious”, which could increase the pressure of “imported inflation” on China.

Several food companies in China have recently raised the prices of their products, including dairy giants Yili and Mengniu.

“The recent acceleration in commodity prices following the Russia-Ukraine conflict has exacerbated pressure on margins for packaged food companies,” Morningstar analysts wrote in a report Tuesday. “Various food and beverage companies in China have engaged in price hikes since the third quarter of last year to ease margin squeeze.”

Analysis: China can do little to help Russia's sanctions-hit economy

China and Russia have forged close ties in recent years and signed a number of commodity deals during Russian President Putin’s visit to Beijing last month. But Russia’s invasion of Ukraine put their friendship to the test.

Beijing has not rushed to help Russia after the latter’s economy was hit by sanctions from around the world. Beijing’s complicated messaging suggests Chinese leaders are walking a “very difficult tightrope” on Ukraine, analysts say.

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