China: A lopsided recovery to further deepen Covid scarring

We have cut our China growth forecast to 3.2% in 2022, from 4% previously, reflecting dismal Q2 growth and the absence of new stimulus. The bigger issue, however, is China’s dynamic zero-Covid policy, which, as long as it persists, seems likely to crimp private-sector growth.

What you will learn:

• In our August baseline, we still expect a pickup in q/q growth in H2, reflecting demand driven by existing stimulus, notably via infrastructure spending, and more generally a normalization of activity after the Q2 lockdowns. But with no new stimulus in H2 to offset the weaker-than-expected Q2 outturn, we have reduced our 2022 growth forecast to 3.2%.
• The key to a stable economic recovery is whether, and when, China can budge from its zero-Covid policy. Though authorities continue to fine-tune policy to reduce supply-side disruptions caused by lockdowns, demand is unlikely to recover sufficiently as long as risks of restrictions remain.
• Real estate remains the key medium-term risk to China’s economy. While containing real estate leverage is beneficial to a sustainable, albeit slower, long-term growth, the process will be bumpy, and the risk of a hard landing in real estate is likely to haunt the economy for some time.