Sleeping Dragon: will China’s economic growth pick up again in 2022

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* This article is part of our 2022 Global Market Outlook collection, where we highlight key themes, trends and levels to watch on our most traded commodities. We will be posting these reports on our pages December 13-20, so please visit the official page of the Outlook 2022 hub to see the whole collection!

2021 in review

2021 started off positively as the Chinese economy built on momentum that saw a return to its pre-Covid trajectory in Q4 2020. After an exceptional increase of + 18.3% in Q1, expectations were low. GDP growth of around 10% in 2021 before falling into the 5.5% to 6% range in 2022.

In March, a new five-year plan (FYP) for 2021-2025 was unveiled at the meeting of the National People’s Congress (NPC). The plan was broad and addressed the three pillars of development – economic, social and environmental.

Key action points, the withdrawal of countercyclical fiscal stimulus and initiatives in the modernization of manufacturing, urbanization, reduction of income equality and decarbonization, including the ambitious goal of achieving ” peak emissions by 2030 and carbon neutrality by 2060 ”.

In May, the Chinese economy was strained under the weight of soaring commodity prices, and the first regulatory reset began. A crackdown on antitrust and fintech companies has sparked memories of three previous regulatory clampdowns, the anti-corruption campaign in 2013-15, the conglomerate investigation in 2016-3Q17 and the broad regulatory tightening in 2018.

In early July, signs that growth and aggregate credit demand had deteriorated prompted the PBoC to cut the reserve requirement ratio (RRR) by 50bp. It was believed that the cut was sufficient to put a growing soil.

At the end of July, Chinese authorities implemented another regulatory change, this time in the education sector, transforming tutoring companies into non-profit organizations. In the face of growing market concerns, the authorities have attempted to provide more clarity by stating that their goal is to strike a balance between social equity and growth.

August brought regulatory changes restricting foreign investment and a resurgence of the Delta variant in many cities and provinces that resulted in rapid shutdowns under China’s Covid-zero policy. Analysts wasted no time revising their growth forecasts downward until the end of the year.

In September, fears of default by Chinese real estate developer Evergrande intensified. Evergrande’s woes are a direct result of Beijing’s regulatory crackdown on real estate developers in late 2020 and efforts to contain house prices.

Further exacerbating the drop in the last quarter of the year, an “electricity crisis” as soaring coal prices and efforts to reduce carbon emissions prompted authorities to implement restrictions on coal. electricity. Power outages meant products could not be manufactured or delivered on time.

The effects of multiple regulatory and police crackdowns have weighed on economic growth and resulted in billions of dollars in the market value of state-owned enterprises being lost in 2021.

Three easing initiatives (described below) were announced in early December at a Politburo meeting that prioritized stabilizing growth.

  1. China’s central bank, the PBoC, announced a widespread RRR of 50 basis points as of December 15.
  2. Beijing has launched a restructuring of the managed debt of developer Evergrande.
  3. The CBIRC (China Banking and Insurance Regulatory Commission) has declared its intention to support both the demand for primary residences and the demand for second homes – the first time since 2015 that Beijing has offered support for the demand for residences. secondary.

Outlook 2022 – Year of the Tiger

Growth

After pulling the global economy out of the Covid pandemic, the Chinese economy underperformed in the second half of 2021 due to a series of regulatory resets and tight fiscal policy.

The easing measures described above should ensure a return to growth between 5 and 6% in 2022, a target likely to be confirmed at the National People’s Congress in March.

Inflation

The PPI jumped to 13.5% in October, its highest level since 1995. The rise was fueled by rising raw material costs and production cuts at factories, as government restrictions on carbon emissions and soaring coal prices have led to electricity rationing.

The electricity crisis has since abated, as have commodity prices. And with minimal pass-through from the PPI to consumer prices, the CPI is expected to stay below Beijing’s 3% target and could drop below 2% if food prices continue to fall.

Geopolitics

The goodwill of the recent virtual summit between the two presidents, Xi and Biden, set the stage for the coordinated release of strategic oil reserves in November by oil-consuming countries and sparked speculation that tariffs could be removed.

Highlighting the complex nature of the relationship, President Biden’s diplomatic boycott of the Beijing Winter Olympics means a rollback in tariffs is unlikely until the games end in mid-February.

What future for the China A50?

The China A 50 was among the worst performing in emerging markets and APAC in 2021, falling nearly 30% from its peak on February 17 to its lowest in July. However, following recent political easing, the context is improving.

Helped by a rebound in interest rate sensitive sectors which account for around 64% of the Chinese A50 index, including food, beverages and alcohol, banking, insurance and financial services, the A50 index Chinese is expected to outperform in 2022.

Technical analysis

As first observed in an article in October here Called “China A50 Basing”, the correction between the February 20688 high and the late August 14516 low appears to be over at the August 14516 low.

“Despite the Evergrande turmoil, the China A50 tested and maintained the August 14516 low, providing basic preliminary evidence.”

In early December, the Chinese A50 triggered a bullish breakout from a corrective trend channel before testing medium term resistance in the 17,000 area.

If the Chinese A50 breaks through resistance at 17,000, the rally would expand to the May high at 18,575.

Based on this point of view, we prefer to trade the Chinese A50 on the long side, looking for higher levels in 2022.

Source: TradingView

What future for the HK50?

This year, the HK50 is among the world’s worst performing major stock markets after regulatory resets in China and the Covid-19 pandemic.

On the basis of the themes already mentioned and a reopening of the border with China, the HK50 is well placed to recover a good part of its peak of 25% at the fall in 2021.

The HK50 will be supported by a rebound in sales from Hong Kong brands and revenues from casino operators and high dividend stocks such as AIA Group Ltd and CK Hutchison.

Technical analysis

The decline from 2018 high 33516 to 2020 low at 20965 is seen as a three wave corrective streak completed after an impulsive move upward.

More recently, a five-wave drop from the February 2021 high of 31116 to the low of 23104 is noticeable and suggests the HK50 is about to set a bottom.

Providing support at 23,000 keeps the expectation of a rebound towards the initial resistance at 26,500, with a possibility for the rally to expand to the 2021 high at 31116.

HK50 Weekly

Source: TradingView

What future for the CNY?

USD / CNY held up to 2021 volatility which included weak data, regulatory resets and the Evergrande saga while trading in a remarkably narrow 3.5% range. Meanwhile, the US dollar’s index, the DXY, has risen more than 7% year-to-date.

Support the CNY with a high merchandise trade surplus, a moderate services trade deficit and continued foreign purchases of Chinese onshore bonds that provide investors with a positive real return.

The CNY is expected to continue to outperform in 2022 despite the increasing likelihood of a faster Fed Taper. Ultimately, that means the USD / CNY is likely headed for a relatively narrow range for the first six months of 2022, between 6.4500 and 6.3000 on the downside.

USDCNY technical analysis

The USDCNY completed a three-wave, multi-year corrective rally from the 2014 low of 6.0402 to the September 2019 high of 7.1842. It’s no surprise that the top was traded during the height of the month. trade war between the United States and China.

In May 2020, shortly after the signing of a trade deal between the United States and China, an impulsive decline of nearly 10% began in USD / CNY before the movement lost momentum at the start of 2021 with the start of the broader rally in the US dollar.

As the US dollar and CNY will continue to attract entries in 2022, further decline is expected to be limited to 6.3000 and, as low as, to the low of 6.2419 of 2018. While rebounds should find sellers between 6.4500 and 6.5000.

USDCNY Weekly

Source: TradingView

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