Will China’s Sneeze Blast Australia?

International | Jun 29 2022

China's GDP growth is forecast to halve in 2022 and the outlook for Australia's resources hangs on the Chinese government's scrambling bid to combat the fall.

-China’s economic growth to halve in 2022
-About-face as slowdown snowballs
-China targeting select industries
-Australia’s exposure 
-Broader global economic outlook

By Sarah Mills

China’s economy has been extremely robust, growing at breakneck speed for the past two decades, delivering windfall profits to Australia’s resources investors.

This trend accelerated in 2020 and early 2021, as covid triggered a shift to goods manufacturing and exports away from services in China, and as the country moved to deepen global dependence upon its supply chains.

But as China’s economy matures, covid unwinds and domestic, geopolitical and ESG tensions take their toll, growth in China is expected to decelerate sharply in 2022.

China’s Economic Growth To Halve in 2022

The Organisation for Economic Co-operation and Development (OECD) expects economic growth in China will slide to 4.4% in 2022, a sharp deceleration from the 8.1% GDP and Producer Price Index growth logged in 2021. 

S&P Global Ratings in its monthly Asia-Pacific Credit Focus for June expects China’s GDP will grow 4.25%. The agency’s downside scenario is for 3.5% growth, if lockdowns remain protracted.

This compares with the International Monetary Fund’s forecast of 4.4% GDP growth in 2022 and 5.1% growth in 2023.

UBS has cuts its GDP forecasts to 3% from 4.2% and forecasts a shallower rebound in the September quarter. Some analysts are forecasting growth as low as 2%.

The Communist Party’s own forecasts in its Budget and Economic Outlook: 2022 to 2032 published in May is for real GDP growth of 3.1% in 2022 and for growth to meander around these levels for several years.

The Chinese government also predicts a quick return to normal as a fall in energy prices and accommodative monetary policy do their work but, like the West, expects recent low interest rates will not be revisited.

Xi's Prosperity Plan Backfires

The deceleration in GDP reflects directly on President Xi Zinping’s Common Prosperity Plan after the ruling party initiated a crackdown last year on corruption and unproductive investment in the housing infrastructure sector, the internet gig economy, and east-coast power brokers.

Property starts fell -44.2% year on year to April after falling -22.2% in March. Excavator sales fell -61% in April and auto sales fell -48%.

In response, Chinese households are saving; businesses have left the country, and expats and bankers are fleeing to Singapore, Dubai and other parts of the world. 

Observers believe China is experiencing a massive brain drain and that it will take at least two years to restore business confidence and for the tanker economy to return to its former growth.

S&P has downgraded much of the country’s financial sector to Stable from Positive.

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