EFG International : Inflation and growth in China

Easing policy in China

In an effort to boost activity, the Chinese government has pivoted on several contractionary policies. Chinese banks increased loans to the private sector, reaching a record high of CNY 3.98 trillion in January 2022. In the same month, the M2 grew by 9.8% YoY, the strongest expansion since February 2021, and the PBOC lowered a range of policy rates. There have also been commitments from China's State Council's Financial Stability and Development committee to relax regulation of large tech companies, provide support for the real-estate sector and wider economy, and ensure stock market stability.

With President Xi expected to secure a third term in power during the Communist Party's 20th National Congress towards the end of 2022, growth and stability will be two of his top priorities this year. Nonetheless, the outlook for China's economy is currently highly uncertain due to Russia's invasion of Ukraine and a new wave of Covid. In the spirit of stability, China's zero-Covid policy is likely to remain in place as stated in the 2022 Government Work Report (GWR).⁵ There may be room for some flexibility within this policy, however, as some factories have been allowed to remain open in 'bubbles' during China's latest lockdown. This highlights the shift in focus to sustaining economic growth.

The same strategy seems to be in place in response to Russia's invasion of Ukraine. The 2022 GWR set the lowest growth target in three decades at 5.5% and President Xi will be keen to avoid becoming too involved in a situation which could worsen the growth outlook. China has been warned about sanctions from the US if it were to support Russia with economic or military aid. As such, China has remained neutral while emphasising its commitment to de-escalation.

To summarise, while President Xi is targeting stability this year, there has been some room for flexibility within policies which promote growth. The easing of fiscal and monetary policy may bring inflation closer to the PBOC 3% target. It is important to note that this flexibility may not have been feasible if Chinese inflation was susceptible to commodity price increases like many economies across the globe and was already suffering the same spikes in inflation as a result.