Chinese hard landing arrives

The downgrades have begun. TS Lombard:

The battle between property and Covid headwinds vs government stimulus will define China macro in 2022. So far, Beijing has failed to land a punch, as Covid and real estate worsen. An unusual statement from Liu He shows signs of panic and promises large-scale stimulus, but this will not be enough to prevent weak growth, particularly as Covid outbreaks reduce the effectiveness of easing. We downgrade our 2022 forecast of China TSL GDP to 4.2% yoy from 4.7% yoy. The constraints of forecasting official GDP means the consensus of 5.1% yoy appears overly optimistic. Weaker China activity will be felt most by global capital goods exporters, while commodity producer are cushioned by higher prices. Rising stimulus supports China government bonds and infrastructure-related securities. Offshore equities remain politically driven with Beijing attempting to provide a floor, but US sanctions and delisting risk pushing back. This means that volatility is guaranteed. We expect RMB depreciation as a policy “release valve” going into H2/22.

Omicron targets economic weak links. Regions accounting for 77% of GDP have imposed various mobility restrictions. The impact on the economy is significant: even though just ~2% of the population is in lockdown, large second- and third-order effects are hitting the weakest parts of the economy – consumption and property. Flagging household spending and real estate purchases are driven by feeble consumer confidence and wage growth. Covid-impacted services (tourism, accommodation, retail and catering) accounted for 25% of registered jobs in 2019 and the sectoral recovery has been weak. Moreover, with manufacturing wages now slipping and the economic outlook anaemic, consumer confidence and spending are likely to remain sluggish.