On January 17th the National Bureau of Statistics (NBS) reported that China’s real GDP grew by 8.1% in full-year 2021.

Analysis

Although real GDP growth exceeded China’s annual target (of above 6%) in 2021, year-on-year growth slowed to 4% in the fourth quarter, highlighting underlying weaknesses. The domestic spread of the Omicron variant of covid-19 since late December in cities such as Tianjin, Shanghai and Shenzhen has led to a tightening of pandemic-control measures, which may not have fully been captured in the fourth-quarter data. GDP growth would have been weaker if not for a lower base number in the previous year, with the NBS having revised down 2020 real GDP growth in December 2021.

Secondary industry remained a driver of China’s economy, growing by 8.2% year on year in 2021, despite power shortages in autumn. Growth in industrial value added was driven by external demand. Domestic demand remains weak, as reflected by retail sales, two-year (2020-21) average growth of which remains far below the pre-pandemic rate of 8%. The main reason for the NBS’s downward revision was that consumption was weaker than the NBS first calculated, suggesting risks around underestimating the negative effects of covid-19 on household spending. Domestic demand will remain weak in 2022 as Omicron inflicts further lockdowns and undermines consumer confidence.

Despite GDP growth being slightly above expectations, China has reached a point whereby officials need to consider more effective ways to offset the negative effects of the “zero-covid policy”. Stimulus policies adopted so far have not been effective enough in supporting the private sector. In 2022 the private sector will remain vulnerable to city-wide lockdowns, continued technology sector crackdown and carbon emissions reduction drive.

Given these challenges, the government will become more proactive in policy easing, although its impact will not materialise until the second half of 2022. The 10-basis-point cut to one-year medium-term lending facility rate (policy rate) to 2.85% on January 17th reflects growing urgency among officials to avoid real GDP falling into sequential contraction in the first quarter of 2022, which points to further easing measures needed given the weak sentiment in the private sector.

Impact on the forecast

EIU will revisit its GDP forecasts of 5.3% in 2022 and 4.9% in 2023 to reflect the base number revision for 2020, more proactive policy easing and Omicron, with a likelihood of revising them down.