China | “Impossible Trinity” of 2022 Chinese economy

Chinese authorities face the “Impossible Trinity” of policy setting in 2022 among “zero tolerance” COVID policy, synchronized monetary policy and 5.5% growth target.

Key points

• Key points:
• Given that the authorities are still pledged to maintain “zero COVID” policy, there are only two possible policy mix: (i) if they want “Zero COVID” and 5.5% growth target, they have to conduct aggressive easing monetary measures, leading to capital flight and RMB depreciation; or (ii) if they want “Zero COVID” and a synchronized monetary policy, they have to accept a lower growth rate.
• April economic data seem to lag behind the easing monetary and fiscal measures. What is worried more by the market is the recent trending-up CPI and the sharp RMB depreciation have actually shrunk China’s policy room for easing measures.
• April economic activity indicators continued to confirm the economic deteriorating trend as all of them fell below market expectations and the previous readings.
• Credit indicators also suggest a significant slowdown. The credit demand from enterprises and individuals remained weak, leading to a weak monetary policy transmission to the real economy.
• We predict Q2 GDP will even dip to 3.3% y/y and will gradually recover since Q3 based on the course of the pandemic, and the whole year GDP will reach 4.5% y/y.

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