China’s economy appears to be bouncing from a “mini-downturn” into an upswing as the country eases policy, according to investment bank Morgan Stanley.
The Asian giant had tightened its monetary policy, embarking on “aggressive deleveraging” as it sought to slash debt in the property sector. It managed to cut the debt-to-GDP ratio by 10 percentage points in 2021 — a magnitude not seen since the 2003 to 2007 period, according to Morgan Stanley in a Dec. 21 report.
But, the bank said: “The pace of tightening proved to be too aggressive, considering that the recovery in consumption growth was curtailed because of the Delta wave and China’s continued Covid-zero approach, which kept consumption below trend.”
Still, the bank said it is “more bullish than consensus” and sees GDP growth in China accelerating to 5.5% in 2022.
Analysts generally expect China’s economy to grow by about 5% in 2022. Deutsche Bank estimates growth of about 5%, while Nomura has a forecast of 4.3%. Analysts have also trimmed their forecasts for China’s 2021 GDP, with estimates ranging between 7.7% to 8.8%.
Here are four reasons why Morgan Stanley expects an “upswing” for China’s economy in 2022.
1. A pause on tightening
Policymakers have already hit pause on their deleveraging efforts and have started to ease both monetary and fiscal policies in the last few weeks, the bank said.
Morgan Stanley noted there were two rounds of reserve requirement ratio cuts recently, releasing liquidity into the economy. That came with guidance to allocate more lending to small and medium enterprises, mortgages and to developers, among others.
2. More relief for China’s real estate sector ahead
In the second half of the year, the country’s beleaguered property sector was ensnared in a debt crisis as Beijing’s efforts to trim debt began to bite. China’s “three red lines” policy places a limit on debt in relation to a firm’s cash flows, assets and capital levels. That started to rein in developers after years of growth fueled by excessive debt.
The cash crunch of the world’s most indebted developer Evergrande came to a head as it finally defaulted earlier this month, while other Chinese developers also started showing signs of strain. Some missed interest payments while others defaulted on their debt altogether.
The debacle has also dented hit homebuyer confidence, sending property sales plummeting.
Morgan Stanley said, however, that relief is coming with a “recalibration” of policy “now well underway.”
For instance, banks have been told to increase mortgage loans and lower lending rates, while some cities are relaxing property purchase restrictions. Authorities have also announced plans to roll out a managed debt restructuring process to limit default risks, said Morgan Stanley.
The blow to investor confidence hit developers’ cash flow as funding dried up. But policymakers are now taking steps to ensure developer funding needs are being met, said Morgan Stanley. That includes urging banks to ramp up development loans and lifting onshore bond issuance restrictions.
3. ‘Less onerous’ energy targets in 2022
Restrictions on imports of Australian coal, China’s plans to reduce carbon emissions and a surge in exports contributed to power cuts across the country earlier this year.
Morgan Stanley, too, noted that the energy targets and goals to reduce power consumption also turned out to be “too aggressive” as China’s GDP growth relies heavily on industrial production.
“However, once the issue of coal shortages surfaced, policymakers have intervened quickly and effectively,” the bank wrote.
There will be a “reset” of those energy targets in 2022, it said.
“We have already seen a quick turnaround in coal production and availability, with mines being restarted and electricity producers being allowed to raise prices to cover the rising input costs,” Morgan Stanley wrote.
4. Exports to stay strong in 2022
The bank also said China’s zero-Covid approach has prevented disruptions to factory production and even led to a rise in its share of global exports.
A favorable global backdrop should further drive strong trade growth, Morgan Stanley wrote.
The bank noted, however, one possible factor that investors are cautious about would be if supply chain disruptions and bottlenecks normalize next year causing China to give up its share of global exports.