The decline in China’s concept stocks and the decoupling of US-Chinese capital markets
The decline in China’s concept stocks and the decoupling of US-Chinese capital markets

The decline in China’s concept stocks and the decoupling of US-Chinese capital markets

With the two sessions ending China’s largest political gathering this year, the next major political event in the country would be the 20th National Congress this fall. By convention, the Chinese leadership will be partially replaced after the National Congress. Premier Li Keqiang stated at the Two Sessions press conference that this year will be his last year as Prime Minister. There is no doubt that 2022 will be a year of major changes in China’s policy.

What will similarly happen to China’s economy this year? Based on the country’s challenging national and international scenarios over the past two years, China’s economy is unlikely to be easy to navigate by 2022. A more likely scenario is that its economy will face significant difficulties. Following the low base impact caused by the COVID-19 pandemic, the country’s economy will undergo several changes.

According to the government’s work report, the main expected targets for this year’s development include GDP growth of around 5.5%; more than 11 million new urban jobs created, urban surveyed unemployment rate to be controlled within 5.5% during the year; CPI growth of around 3%; synchronization of citizens’ income growth and economic growth; imports and exports have been stabilized and improved with a stable balance of payments. Other targets include grain production to remain above 1.3 trillion kilos; improvement of the ecological environment with a continuous decrease in major pollutants. During the 14th five-year plan period, the country’s energy consumption intensity targets will also be assessed overall, while maintaining some flexibility, and the newly recognized renewable energy and raw material energy consumption will not be included in the total energy consumption. control.

In fiscal policy, the deficit ratio is planned to be around 2.8% this year, which is lower than last year. For China, fiscal spending in 2022 has grown by more than 2 trillion RMB compared to last year. Central government expenditure at its own level will increase by 3.9% this year, of which central government expenditure will continue to grow negatively. Transfer payments from the central government to local authorities increased by about 1.5 trillion RMB, with a scale of almost 9.8 trillion RMB, an increase of 18%, the largest increase in many years.

The economic development for China this year will be centered around the goal of 5.5% growth. It is the first time in more than three decades that China has set its annual economic growth target below 6%. Although it is not news that the country’s economy has entered the stage of medium growth from high speed growth, it is still a major event for the Chinese economy to set the growth target at the level of around 5%. As the world’s largest emerging market country, China’s economy can be compared to a heavy train with many structural problems. It must maintain a certain speed; if it is too slow, some parts of the train will fall off. Moreover, China is dealing with an aging population before the country accumulated sufficient wealth. Under such circumstances, its most fundamental task is to maintain stable growth.

For the past two years, the global economy has been affected by the COVID-19 pandemic. In the face of such a disturbance, ANBOUND proposes that China’s economic status should be evaluated on a three-year average. We also noted that due to the low base impact, 2021 will have the largest economic growth rate in three years, but that the most crucial economic growth rate will be in 2022, which will define the country’s future economic growth conditions. Nationally, China’s economic challenges will also be taken into account in relation to national policy. In 2020 and 2021, the two-year average growth rate of China’s economy was 5.1%. By the end of 2021, its GDP reached 114 trillion RMB.

China’s GDP Scale and Growth, 2001 to 2022

Source: China National Statistics Office, graphics: ANBOUND

In the last 10 years, China’s economic growth has slowed. During the 18th National Congress, China’s economic growth rate fell from 7.7% to 6.7%; and during the 19th National Congress, it continued to slow to 5.1% (based on the two-year average growth rate from 2020 to 2021). Between the years, China’s economic growth rate fell by 2.6 percentage points. Apart from the growth rate of 8.1% in 2021 due to the base effect, there is basically a linear downward trend. It must be admitted that for China, with a population of more than 1.4 billion and an ever-aging population at the time, a significant slowdown in the economic growth rate of 2.6 percentage points over the past decade poses a daunting challenge. If the usual feature of an economic recession is a “general loss in economic power”, China’s economic recession danger cannot be overlooked.

To address the impact of the pandemic and stabilize economic growth, the Chinese authorities have adopted various economic policies in recent years, the list of which includes proactive fiscal policy, new infrastructure, internal and dual circulation, high-tech and low-carbon development, and so on. . All of these approaches are aimed at achieving the balance between stabilizing growth, structural adjustment and risk prevention. At the two sessions this year, Prime Minister Li used the metaphor of “mountaineering” to describe the 5.5% economic growth rate.

According to the size of China’s economy 10 years ago, an increase of 10% growth would require RMB 6 to 7 trillion; however, the same increase would require 9 trillion RMB now. It’s like climbing a mountain at 1000 meters; just climb 10% of the way, 100 meters is enough. But when you climb a mountain of 3,000 meters, climbing 5% means that you have to climb 150 meters; and the conditions for climbing will also change. The climber must encounter lower air pressure and less oxygen when climbing higher. The pace seems to slow down, yet the climber actually goes higher.

What Prime Minister Li described is, in fact, the actual situation. However, it should also be noted that as the base rate rises, if economic growth declines at this point, the resulting gap in economic growth will also be larger. For example, for a base of 100 trillion, a 2.6 percentage point slowdown in growth would result in a 2.6 trillion increase in the difference.

In fact, China has benefited from the pandemic in the last two years because, on the one hand, it has strengthened its position as a “world factory” due to its effective pandemic prevention measures, and on the other hand, the United States and other countries have launched macroeconomic stimulus plans. which in turn has increased global demand, thereby boosting China’s exports and improving its economic growth. In RMB terms, imports and exports of goods to China increased throughout the year 2021 by 21.4% year-on-year. Among them, exports increased by 21.2% year-on-year, imports increased by 21.5% year-on-year and profits increased by 20.2% year-on-year. The attraction from the external market is a major reason for its two-year average growth of 5.1%.

If the aforementioned characteristics that increase China’s export development disappear in 2022, as we predicted before, the country’s economic momentum may wane. In fact, signs of this are already beginning to emerge. According to data from China’s General Administration of Customs, imports and exports increased by 13.3% year-on-year in the first two months of 2022. Among them, exports increased by 13.6% year-on-year, imports increased by 12.9% year-on-year and trade surplus increased by 16.3% year-on-year. Compared with the foreign trade data for the whole year 2021, the year-on-year growth rates for imports and exports, exports, imports and profits in the first two months of this year have fallen by 8.1, 7.6, 8.7 and 3.9 percentage points resp.

In addition to changes in foreign trade, the recovery in domestic consumption over the past two years has remained sluggish, dragging down the overall economic recovery. Judging from the data, total retail sales of domestic consumer goods in 2021 were RMB 44,082.3 billion, an increase of 12.5% ​​compared to the previous year, and the average growth rate for the two years was only 3.9%. At Two Session this year, Premier Li admitted that current consumer demand is actually relatively weak, primarily due to the weak offline consumer demand. If a large number of companies close down, it will take a heavy toll on market vitality and the living standards of the population.

Furthermore, the impact of the war between Russia and Ukraine is a new shock factor that the Chinese economy will face. This war of unknown duration will significantly drag down the European economy and, to some extent, the Chinese economy. If we consider the deteriorating geopolitical context in which China will operate in the future, economic growth this year or even in the coming years may be put under much more pressure.

All in all, China’s economic growth faces several challenges this year. If the growth target of 5.5% can really be achieved, this will be considered as a satisfactory economic performance. But given the historical background of China’s economic development, this is not an impressive figure. On the contrary, it is worth noting that China will be in a process of sustained economic downturn for a long time to come. The rate of 5.5% is, even though it is the lowest target for years, still a very high number to reach. In the later years of the 14th Five-Year Plan, China’s economy may have to strive to maintain 5% growth.

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