Compared with previous virus variants, Omicron is highly contagious, so it is difficult to control. Since mid-March, in order to curb the spread of the virus, some cities across the country have taken containment measures. Shanghai has been closed for two months since the end of March. In addition, Beijing, Shenzhen and other cities have also implemented some closure measures. In the second quarter of 2022, the epidemic prevention and control led to the interruption of logistics, transportation and supply chain.
Third, with the decline in the number of cases in COVID-19 and the introduction of stimulus measures, the economy has shown a trend of recovery
Encouragingly, the average daily growth rate of cases slowed down in May. Local governments gradually relaxed restrictions. In order to strike a balance between reducing the impact of the epidemic and eliminating social cases, the health department requires big cities to carry out normalized nucleic acid testing. At the same time, the government announced a series of stimulus measures to revitalize the economy.
1. Industrial production leads the overall recovery.
Following the contraction in April, industrial production ushered in a significant rebound in May-June. Due to rising commodity prices and strong demand, the output of mining industry has grown strongly in all industries. At the same time, thanks to the demand for digitalization and local technology, the performance of high-tech industries is also stronger than other industries.
2. The recovery of retail sales is weak
After shrinking for three consecutive months, retail sales rebounded slightly from May to June. The intermittent outbreak of COVID-19 epidemic and virus prevention and control measures have greatly limited offline face-to-face service. In the past two years, tourism, catering and other consumer services were the main weak links in China's economy. Nevertheless, with the improvement of the epidemic situation in COVID-19, consumer spending will gradually pick up in the second half of 2022. However, the substantial recovery of consumption depends on the improvement of employment and income prospects and the relaxation of epidemic prevention and control policies in COVID-19.
3. Infrastructure investment increased and investment increased steadily.
In April, COVID-19 epidemic prevention and control measures led to a sharp slowdown in investment. From May to June, infrastructure investment played a leading role in stabilizing investment growth. Although the growth rate gradually slowed down, the manufacturing investment maintained a healthy growth in the first six months, with a year-on-year increase of 10.4%. Traditional infrastructure investment is still an important part of public investment, and "green and new" infrastructure investment accounts for an increasing share of public investment. The government plans to upgrade China's growth model and cultivate local technology under the background that the United States strengthens its technology restrictions on China.
Although the real estate industry continues to be weak, it has shown signs of improvement.
The performance of the real estate industry was weak in April and May. In June, the daily sales of real estate in 30 big cities in China rebounded. The pent-up demand and the relaxation of real estate policy have both played a boosting role. More and more cities have relaxed restrictions and announced new preferential measures to support real estate transactions. According to the latest regulatory guidance, commercial banks can lower the lower limit of the first home loan interest rate by 20 basis points. In addition, in order to stimulate the real estate demand, the People's Bank of China (PBoC) lowered the market listing price (LPR) of the five-year mortgage loan as the benchmark interest rate by 65,438+05 basis points.
5. After the outbreak was interrupted, exports rebounded rapidly.
The strong demand for China's exports was a highlight of China's economy during the epidemic. However, because the developed countries chose to "save with COVID-19", lifted the restriction of keeping social distance and withdrew the stimulus measures, the export growth rate slowed down gradually this year. In the second quarter of 2022, a new round of epidemic in China led to the interruption of exports. However, due to the relaxation of restrictions in Shanghai and the recovery of domestic supply chain, the export growth rebounded more than expected from May to June.
6. Due to the low inflation rate, there is still room for easing monetary policy in China.
Driven by western countries' energy sanctions against Russia, energy prices have risen, leading to increased global cost-driven inflationary pressure. However, the low inflation in China is in sharp contrast with the persistent high inflation in major western economies. In western developed economies, large-scale monetary easing policies and large-scale fiscal stimulus measures for households not only supported economic recovery, but also increased demand-driven inflation.
In contrast, China's monetary easing policy is more restrained. China's fiscal stimulus measures mainly promoted investment and pushed up producer prices. However, in China, the transmission from producer price to consumer price is limited. The intermittent outbreak of epidemic in COVID-19, the tightening of epidemic prevention and control policies, and the sluggish real estate have put pressure on the recovery of consumption. After deducting food and energy price fluctuations, the annualized core inflation rate remained at a low level of 1% in June. Therefore, the People's Bank of China can maintain monetary easing policy under the condition of less inflationary pressure, which is in sharp contrast with the rapid interest rate increase in developed economies.
Fourth, to achieve the growth target of 5.5% in 2022, additional stimulus measures are needed.
Looking ahead, we expect that the economy will continue to recover in the second half of 2022. Policymakers will use infrastructure investment, a key countercyclical macroeconomic management tool, to stimulate aggregate demand. Sustained fiscal stimulus measures will not only support the growth momentum, but also boost the confidence of enterprises and consumers. The 11th meeting of the Central Financial and Economic Committee held on April 26th proposed to increase infrastructure investment.
In 2022, the quota of local government special bonds will be basically completed by the end of June. Local government bonds issued in advance will provide funds for infrastructure investment projects. In addition, on June 1 day, the State Council instructed policy banks to increase infrastructure credit lines by 800 billion yuan. At the the State Council executive meeting held on June 29th, Premier Li Keqiang announced an increase of RMB 300 billion in financial bonds and other financial instruments to provide funds for infrastructure investment [2].
Although the scale of traditional infrastructure is still large, policy makers give priority to "green and new" infrastructure projects [3]. "Green and new" infrastructure is the key to upgrade China's growth model and achieve carbon emission reduction targets. On March 23rd, China's first medium-and long-term plan for the development of hydrogen energy industry, Medium-and Long-term Plan for the Development of Hydrogen Energy Industry (202 1-2035), was released, which indicated that China was steadily moving towards the carbon neutrality goal of the peak carbon dioxide emission [4]. In addition, the list of sanctions imposed by the United States on China's technology companies is increasing, which highlights the urgency of developing independent technologies.
VAT refund, subsidies and extending the scope of deferred payment of social insurance will support the development of small and medium-sized enterprises affected by the epidemic. In addition, considering that small and medium-sized enterprises are hit harder than large enterprises, the government also plans to increase the procurement of small and medium-sized enterprises.
Unlike tightening monetary policy in other parts of the world, we expect that the Bank of China will maintain a loose monetary policy due to moderate inflation prospects and weak domestic demand. Yi Gang, governor of the People's Bank of China, said recently that China's policy interest rate is at a low level, and the current focus is to increase credit supply [5].
The previous monetary easing policy helped stabilize the real estate industry. After the recent downturn, real estate investment is expected to return to stability. Many local governments have relaxed restrictions on the real estate industry and introduced support measures to support real estate transactions. Regulators have also relaxed restrictions to ease the financing difficulties faced by real estate developers.
Export growth is expected to slow down in the second half of 2022. The rapid tightening of monetary policies in major public utilities and developed economies, as well as the continuous shift of consumer spending from commodities to services, may weaken the demand for China's exports. The US government may cancel tariffs on some goods made in China, which is a small plus. However, this cannot offset the impact of the US economic slowdown on China's exports.
Although the impact of epidemic prevention and control policies may be reduced, the potential COVID-19 epidemic and the resulting closure are still the main downside risks to China's economic prospects. Especially in some countries, a new round of epidemic is spreading. Adhering to the prevention and control policy will continue to put pressure on consumer spending. However, the health department announced some measures to relax the epidemic restrictions. For example, from June 28th, the isolation time for entry personnel and close contacts with confirmed cases was shortened from 14 days to 7 days [6].