ANALYSIS-China fights for options as COVID threatens economic goals

Band Kevin Yao

BEIJING, April 28 (Reuters)Chinese policymakers are struggling to find ways to stave off an economic slowdown that threatens job losses in a politically sensitive year as COVID-19 lockdowns disrupt supply chains and rattle businesses .

Beijing is sticking to an economic growth target of around 5.5% this year and expects to create more than 11 million new urban jobs, according to political insiders.

However, analysts say that goal will become harder to achieve unless China eases its zero COVID policy, which it has shown little sign of doing.

Stability is vital for 2022, with a twice-a-decade meeting of the ruling Communist Party in the fall expected to cement President Xi Jinping’s leadership for an unprecedented third term.

“We need to step up policy support for the economy to offset the impact of COVID, but the effectiveness of macro policies has been diluted by COVID control policy as supply chains are broken,” Xu Hongcai, deputy director of the economic policy commission at the state-backed China Political Science Association, told Reuters.

China’s success in containing domestic coronavirus cases over the past two years has been marred by its worst outbreaks since the pandemic began. The new infections have plunged major cities into strict lockdowns and raised questions about the sustainability of its strict zero-COVID policies.

Societe Generale estimates that provinces with significant mobility restrictions represent 80% of gross domestic product (GDP).

The Politburo, a top decision-making body of the ruling Communist Party, is expected to hold a meeting this week and investors are looking for clues on the policy.

Worries over capital outflows and inflation could limit the scope for monetary support, with aggressive Federal Reserve policy tightening likely to drive funds back into higher-yielding US assets.

On Tuesday, Xi chaired a high-level meeting that announced a big infrastructure push to boost demand, reinforcing Beijing’s preference for big-ticket projects to spur growth.

In 2008 and 2009, China relied on 4 trillion yuan ($605.82 billion) in spending to shield the economy from the global financial crisis, creating a mountain of debt.

With returns from traditional projects such as highways, railways and airports now much lower, China has tried to develop new infrastructure focused on 5G, artificial intelligence and data.

Beyond these stimulus measures, Beijing has pledged to grant more tax and fee reductions.

China has set an annual budget deficit target of around 2.8 percent of GDP for 2022, as well as an annual quota of 3.65 trillion yuan in local special bonds to fund infrastructure investment.

Zhang Ming, senior economist at the Chinese Academy of Social Sciences, a leading government think tank, said in a report on Monday that the government should raise its deficit target to 3.0-3.2 percent of GDP and issue special treasury bills on a large scale to finance key projects and help small businesses.

Such a move would require parliamentary approval and could only happen if the outlook dims significantly, political insiders said.

Pressure to support jobs is mounting, with the official unemployment rate hitting 5.8% in March, a nearly two-year high.

“We cannot rule out the possibility that the government will step up financial and fiscal measures if the COVID situation worsens and economic pressure intensifies,” said a government adviser who spoke under the guise of anonymity.

Wang Yiming, a central bank adviser, told a forum this week that the government should step up policy support to ensure growth returns to above 5% in the second quarter.

Some analysts view current targets as overly optimistic.

Ting Lu, chief China economist at Nomura, cut his second-quarter growth forecast to 1.8% from 3.4% in the first quarter, from 4.8% in the first quarter, citing more lockdowns, severe logistical disruptions and no sign of change in COVID policy. Its growth forecast for the full year was revised down to 3.9% from 4.3%.


Authorities in Beijing and elsewhere are now opting for rapid, targeted lockdowns and early detection of infections, desperate to avoid the kind of citywide lockdown Shanghai has been struggling with for a month.

Such prolonged restrictions across the country would aggravate existing production bottlenecks and undermine investor and consumer confidence.

“This supply shock could further weaken demand for housing, durable goods and capital goods due to lower incomes and growing uncertainty,” Lu said in a client note.

Last week, the International Monetary Fund lowered its growth forecast for China in 2022 to 4.4%, citing risks of widespread lockdowns and disruptions from COVID-19.

The People’s Bank of China (PBOC), which cut banks’ reserve requirement ratio (RRR) by 25 basis points this month, surprised markets by holding its benchmark lending rate steady.

Nomura’s Lu expects the central bank to cut the RRR by another 25 basis points before mid-2022 and cuts of 10 basis points on key policy rates, before easing funding restrictions for investors. local governments and the real estate sector.

“These policies may help, but the real bottlenecks to growth remain,” he said.

($1 = 6.6026 Chinese Yuan)

(Reporting by Kevin Yao Editing by Tony Munroe and Sam Holmes)

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