China Economic Outlook. Third Quarter 2022

Summary

Chinese authorities face "Impossible Trinity" of policy targets in 2022. They reverted to “old" economic growth engine-infrastructure, real estate and exports-to stimulate growth from Shanghai lockdown.

Key points

• Key points:
• Chinese authorities face an “Impossible Trinity” or “Trilemma” in 2022 policy setting among three policy targets: “Zero Covid”, financial stability and 5.5% growth target.
• The economic recovery path will be similar to that of Wuhan lockdown in 2020, that means, production and investment will lead the recovery while consumption will significantly lag behind.
• The pace of economic recovery from lockdown depends on whether further large-scale lockdown will be imposed again in large cities; the policy room and how effective the easing measures, i.e. the monetary transmission mechanism.
• The authorities had a significant policy turnaround from 2021 regulatory storms to expansionary measures in 2022 after Shanghai’s lockdown. The highlights of the stimulus package for 2022 include expansionary monetary and fiscal measures as well as housing market regulatory forbearance.
• The recent home buyers' refusal to pay mortgage loans due to developers' delayed delivery of the pre-sale properties has constituted a systemic risk to China's financial system. But China's authorities won't let it go given the political agenda of this year, thus, we expect the authorities to intervene resolutely and quickly to limit the systemic and social risks.

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