Macro – China outlook

Chinese economy facing a wall of worry

13 June 2022

By Henk Potts, London UK, Market Strategist EMEA

  • The Chinese economy is in the midst of a slump – as its property market crisis deepens, and sliding consumer confidence has been exacerbated by lockdowns in Shanghai, Beijing and other large cities
  • The country’s zero-COVID approach is dashing hopes of a quick recovery, as consumer spending retreats
  • Attempts to clamp down on some industries, prime among them technology, have also worsened the corporate mood. Although encouraging industrial production, export orders, and company investment data offer signs of hope.
  • Given the slowing economy, Beijing’s official growth target of 5.5% seems unlikely to be met in 2022, and possibly next year too, at the current rate of going.

Economic growth has tumbled of late, in the face of a housing market crash, poor consumer sentiment, a rigorous zero-COVID policy, and weakening global output, and shows few signs of a quick recovery. The authorities are loosening policy and turning on the spending taps in response to the downturn. But can they do enough to help the economy meet the official growth target this year?

Chinese growth has slumped over the course of the past year. The government’s commitment to its zero-COVID strategy, downturn in the property market, and regulatory crackdown have conspired to slash gross domestic product (GDP) growth to 4.8%1 in the first-quarter (Q1) of the year compared to 18% in the same period last year. 

There is mounting concern now over the ability of the world’s second-largest economy to achieve its official 5.5% growth target in 2022 (see table).

China economic forecasts, year on year (%)




GDP growth




CPI inflation




Unemployment rate








Source: Barclays Research, Barclays Private Bank, May 2022

Zero-Covid strategy

While governments around the world have adopted strategies that see societies trying to live with coronavirus, this is certainly not the case in China. Even the most minor outbreaks are met with a strict regime of mandatory testing, enforced quarantine periods, and citywide lockdowns when required. Around a quarter of the Chinese population are estimated to be the subject of varying degrees of lockdown, with Beijing, joining Shanghai among others, imposing restrictions at the end of April. 

The Chinese authorities’ rationale for imposing the strategy is driven by concerns that the Omicron variant could overwhelm its health system. A system left exposed by elderly vaccination rates that remain low and by the efficacy of its domestically produced vaccine being below that of international rivals’ alternatives.

The size and scale of the lockdowns have begun to infringe on China’s aspiration to drive growth through domestic consumption. Retail sales contracted by 11% in April compared with the previous year (see chart). The official unemployment rate rose to 6.1%, its highest level since February 2020. Future household consumption could also be constrained by rising unemployment and higher levels of debt.  

Housing market under pressure 

Chinese authorities have introduced measures such as loosening credit controls and allowing more bond issuance in an attempt to ease the pressure on its property market. These policy adjustments appear to be having only a minor impact. Data from the National Bureau of Statistics showed that property sales fell 26% (by value) year-on-year (y/y) in March, while housing starts also declined 22%, following the 12% reduction registered in January and February. 

Private developers have pulled back from buying new land and property investment turned negative at the end of the first quarter. The crash in the property market has serious implications for Chinese growth, given that it accounts for around 25% of GDP when construction, land sales, and other related activity is taken into account. 

Regulatory crackdown  

China has embarked on a broad-based regulatory crackdown of its technology sector over the last year. The purpose of the overhaul is to safeguard consumers while protecting data and national security. Authorities have introduced online time limits for under-aged gamers, as well as new rules that govern the way technology companies use “recommendation” algorithms. The increase in oversight has spooked shareholders in some of the largest technology companies and discouraged investment.


While service and consumption remains under pressure, industrial production, exports, and fixed asset investment have been far more resilient.  

A new “closed-loop system” appears to have limited the impact of strict lockdowns on manufacturing. Under the arrangement workers are required to stay in “bubbles” that restrict their movements, even when outside the factory. An easing of logistical disruption should allow industrial production to return to growth in the coming months, but weakening external demand and increasing competition from rival Asian economies could limit the pace of progression. 

Investment in infrastructure continues to be a pillar of growth in China. Fixed asset investment surged 9.3% in Q1 and local governments have planned investments on 71,000 major projects this year, which continue to be funded through the issuance of special bonds.

Export demand resilient   

While domestic demand has been weakening, export demand remains resilient despite the tough year-on-year comparisons. Chinese export growth came in at a higher than expected 14.7% in March2. This was the 18th consecutive month of double-digit increases. 

Outbreaks of COVID-19 in overseas countries helped to boost demand for masks and medical-related exports, which accounted for 13 percentage points of the export growth. Alongside medical supplies, demand for technology also continues to be positive.

External consumer confidence takes a hit   

Weakening international consumer confidence is hitting demand for home appliances, semiconductors, and mechanical and electrical products. Specifically, the rising cost-of-living pressures in the EU and the UK is starting to weigh on export growth to those economies.

Imports slow   

Weakness in housing construction, softening domestic demand, and higher commodity prices have led to significant slowdown in imports. Imports of copper (-8.7% y/y) and iron ore (-14.5% y/y) plummeted in March, while the volume of coal imports plunged 40% and crude imports by 14%. The reduced demand from the world’s largest importer of base metals and energy could start to ease supply-demand pressures in global markets. 

Policy response    

In response to the rapidly slowing economy, the People’s Bank of China cut lending rates, reduced the reserve requirement ratio, and relaxed its credit policy. The central bank pledged, at its Q1 Monetary Policy Committee meeting, to provide more substantial support for the real economy, especially for small- and medium-sized enterprises, green, and agricultural financing. 

We also expect more focus on the implementation of monetary policy by expanding the scale of new loans, lowering real interest rates on bank loans, and easier access to market financing for the private sector. 

Credit growth in April increased 10.2% y/y, reflecting further fiscal easing through the front-loading of government bond issuance. However, the reading was weaker than in March due to a large fall in new loans and decrease in corporate bonds. A sustained improvement in credit growth is doubtful, given the authorities’ commitment to keep the macro leverage ratio broadly stable. 

The Government Work Report vows to stabilise land and house prices and to roll out city-specific housing measures. While the loosing of policy will take time, we still expect an easing of regulatory and macro prudential policies, including lowering payment ratios, cutting mortgage rates, and relaxing home-purchase restrictions to help restore some confidence in the battered sector. 

Growth target looks ambitious

The government’s official target of 5.5% growth for this year still looks ambitious, even though it’s lower than the “above 6%” level for 2021. China’s commitment to zero-COVID is expected to prolong the weakness in consumption and services. The deterioration in the housing market, dampening of external demand, and lack of aggressive fiscal and monetary stimulus, suggests that expansion of closer to 3.3% is far more likely this year. 

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