China Outlook 2022 – New growth drivers come to the fore

As China enters the Year of the Tiger, it faces a difficult economic environment. Weakness in the property sector is spilling over to affect the broader economy, consumption is weighed down by sporadic outbreaks of COVID-19, and although trade figures remain strong, recent macro indicators are subdued.

Chinese policymakers are aware of the challenges they face, and 2022 will be characterised by a steady stream of easing measures designed to get the economy back on track.

“If policymakers can implement the right mix of easing, we believe that there is a very good chance that the economy could gradually pick up, and by the third quarter, we will likely see headline GDP growth pick up to 5.5 per cent, or even close to 6 per cent,” said Qu Hongbin, Co-Head of Asian Economic Research and Chief Economist Greater China at HSBC Global Research.

Easing measures to come

The government will use a wide range of tools to support the economy. On the monetary policy front, we can already see policymakers in action. In the first few weeks of the year, the People’s Bank of China lowered rates on the one-year medium lending facility,¹ the one-year and five-year loan prime rates². Mr. Qu expects more cuts to the reserve requirement ratio (RRR) in the coming months.

When it comes to fiscal policy, Mr. Qu forecasts that Beijing will ease the restrictions on local government financing, which will help lift infrastructure investment spending. The result is infrastructure investment will recover from the low levels seen in 2021.

The last set of easing measures will be regulatory. Last year, the government introduced a series of new rules affecting education companies, property developers and digital platforms. In 2022, the regulatory drive will be more gradual and transparent.

“The objectives of the regulations are desirable, but the consequences on economic activity have been serious,” said Mr. Qu. “The authorities will now prioritise growth over other policy objectives.”

Growth drivers of the future

With a weak property market, what will drive the growth recovery? One area of note is the manufacturing sector, where there are signs of a pickup in capital expenditure – especially for middle and high-end factories.

The cyclical explanation for this trend, said Mr. Qu, is that industrial profits have been strong over the last two years, leaving manufacturers with the cash to support expansion, which is needed as capacity utilisation rates are at pre-pandemic levels.

There is also a structural reason for the manufacturing upgrade. Chinese workers are more skilled than ever before, with a new generation of workers entering the workforce with skills in science, technology and engineering. These skilled employees come in time when China is climbing the global value chain, says Mr. Qu.

Another growth driver that is gaining speed is sustainability. The International Energy Agency estimates that China will have to invest USD640 billion annually by 2030 to achieve its net zero goals, rising to USD900 billion per year between 2030 and 2060³. In the power sector, this will mean replacing coal power with renewable sources, while industrial companies will have to improve their energy efficiency.

“The beauty of green investment is that although it is a long-term transition to realise structural change, it can also act as a short-term growth stabiliser,” said Jing Liu, Senior Economist, Greater China at HSBC Global Research. For example, demand for renewable power equipment will push up capex, while benefiting the industrial firms in their green transition.

Equity market outlook

Despite the testing economic environment, the outlook for China’s onshore equity market is positive. “We believe that the A-share market could deliver satisfactory returns, with small and mid-cap companies benefitting more than large caps,” said Steven Sun, Head of Research, Operating Committee Member at HSBC Qianhai Securities.

There are several factors behind this forecast. Firstly, support will come from the policy shift away from de-risk and deleverage to pro-growth measures. Furthermore, profitability will hold up given the favourable inflation situation. And finally, market liquidity will remain ample with flows from the Northbound channel of Stock Connect remaining strong, while domestic households will continue to diversify their wealth into financial assets.

Mr. Sun highlighted investment themes where companies will likely benefit from fundamental transitions in the economy. The shift towards the green economy is a case in point. For example - it will create opportunities for companies positioned along the entire electric vehicle value chain – from cars to new infrastructure and materials. Technology is another attractive area, with semiconductor companies that help China achieve tech self-sufficiency a highlight; while in consumer electronics, augmented and virtual reality will be a key theme in 2022.

China – still attractive in 2022

Despite the challenging economic backdrop, China remains an attractive place to invest and do business. Over the next 12 months, the key to success will be understanding how to find opportunities in a market where there are new growth drivers.

The property sector will take a back seat, as infrastructure spending becomes more focused on sustainability. Manufacturing will remain an economic engine, but one that is climbing the value chain. Strategies that capitalise on these changes will be key to success in the Year of Tiger.

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