China's inflation rate and pandemic recovery are putting it in a very different place compared to developed markets
While the developed markets are concerned about inflation and pandemic recovery, China is in a very different place and shouldn’t be a source of volatility in the global financial market in the coming year, according to Vanguard’s Asia-Pacific chief economist.
“In the Asia-Pacific region, including China, you can see that the consumer price inflation is relatively benign, largely due to a slow economic recovery,” Qian Wang said.
“Unfortunately, this region was really hit hard by Delta in the middle of this year. That, coupled with slower vaccination progress and a more conservative approach to containing the virus, has significantly restrained the recovery. In particular, when you look at China, the weak economic recovery this year has been particularly disappointing, even though China was the first one out of the pandemic last year.”
Wang said there had been a “perfect storm” of policy tightening – monetary, fiscal, and regulatory – in 2021.
“Based on our estimation, the regulatory tightening has affected the sectors accounting for almost 50% of China’s economy, including property, energy, internet, fintech, and gaming,” she said. “In our view, this move actually marks a permanent shift in China’s policy priority from just higher growth rate to other goals, including higher growth quality, financial stability, carbon neutrality, and also income, or wealth, equity. While transition into this new policy regime could make China’s growth more sustainable in the long-term, it is creating significant growth headwinds in the near-term.”
Given that Vanguard expects that to be a permanent change, she said the regulatory tightening probably won’t reverse in 2022. In fact, Vanguard thinks the property downturn will deepen, and it expects a two percent drag on it.
Wang said Vanguard expects China to grow at 5.1%, rather than 7.8%, in 2022, which is below its estimate. She said Vanguard is more concerned about how the impact of policy uncertainty could dampen business sentiment and investment.
“This means the output gap will remain negative by the end of this year. Producer price inflation has already peaked, and core consumer price inflation is unlikely to be a concern, even though it could move up from 1% to about 2% next year,” she said, noting that’s still well below China’s inflation target of 3%.
Wang isn’t expecting a very aggressive easing, like what happened in 2008 and 2015, since she said monetary policy in China generally tries to maintain a balance between near-term growth and stability and supporting measures to limit speculation, credit risk and inflation. So, she said China has no intention to overstimulate the economy.
“Their pain tolerance is actually getting higher as they move into this new policy regime. So, once growth stabilizes next year, the policy maker will back off and turn toward a neutral stance,” she said. “Overall, for China, I would say that we’re not expecting a hard landing, but we expect slower growth in 2022,
“The weaker China growth will spill over to the rest of the world, including Asia,” she added. “But I would say China shouldn’t be a major source of volatility in the global financial market.”
