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Economic ResearchNovember 29, 2021Special ReportGreater China 2022 Economic OutlookMainland China: The choice between pace and structure of growth Our 2022 growth forecast is 4.7%, likely belowthe governments growth target The change in policy regime to focus on multi-dimension high-quality growth implies no reversal in housing policy, de-carbonization ortech regulation Counter-cyclical fiscal and monetary policy isunlikely to provide a meaningful stimulus Risks arise from uncertainties in the property market outlook, pol-icy response function, labor market conditions, local government entities and US-China relationshipHong KongSAR: Incomplete recovery while embracing GBA GDP growth may moderate to 2.9%y/y in 2022 after this years rebound, with an incomplete recovery and 7%-pts persistent out-put gap from the pre-pandemic trend HIBOR will follow suit if the Fed liftoff starts inSept 22; housing prices should remain stable with modest gains Innovation and green finance in focus to strengthen Greater Bay Area integrationTaiwan: Domestic demand to pick up steam in 2022 Taiwan exports have grown about 20% since the pandemic; export growth is likely to settle around mid-single digitsin 2022 as global growth shifts towards services Domestic demand to pick up steam as virus drag fades, with export strength and capex boom feeding through to household income; we expect GDP growth to be3.7% in 2022 We expect headline CPI inflation to stay above 2% in 4Q21 and 1H22; 2022 inflation to average at 1.9%yoy Growth-inflation dynamics are conducive tomonetary policy nor-malization; central bank to raise policy rates for the first time in 11 years Table of contentsMainland China: The choice between pace and structure of growth 2Hong Kong SAR: Incomplete recovery while embracing GBA 10Taiwan: Domestic demand to pick up steam in 2022 14Haibin Zhu(852) 2800-JPMorgan Chase Bank, N.A., Hong KongGrace Ng(852) 2800-JPMorgan Chase Bank, N.A., Hong KongTingting Ge(852) 2800-JPMorgan Chase Bank, N.A., Hong K2Economic ResearchGreater China 2022 Economic OutlookNovember 29, 2021JPMorgan Chase Bank, N.A., Hong KongHaibin Zhu(852) 2800-Grace Ng(852) 2800-Tingting Ge(852) 2800-Mainland China: The choice be-tween pace and structure of growth Our 2022 growth forecast is 4.7%, likelybelow the gov-ernments growth target The change in policy regime to focus on multi-dimension high-quality growth implies no reversal in housing policy, decarbonization and tech regulation Counter-cyclical fiscal and monetary policy is unlikely to provide a meaningful stimulus Risks arise from uncertainties in property market out-look, policy response function, labor market conditions, local government entities and US-China relationshipChinas first-in-first-out (FIFO) advantage in 2020 was re-placed by a notable under-performance in 2021 (Figure 1.1). In the first three quarters of 2021, the economy continued to register below-potential growth at 5.1%, 4.1% and -3.3%q/q saar, respectively (JPM estimates), while average annual growth in the past two years printed at 5%, 5.5% and 4.9%, and is likely toslow down further in 4Q. Chinas economic slowdown was mainly policy-induced. While the directional change of policies was well-anticipated at the beginning of 2021, two developments were unex-pected. First, the scope and magnitude of policy tightening, including fiscal and credit tightening in 1H21, and an aggres-sive all-out approach to industry policy tightening (e.g. hous-ing, decarbonization, tech regulation, education), werebe-yond market expectations and led to a faster-than-expected economic slowdown. Second, thepace of macro policy ad-justment in 2H21 (following the unexpected RRR cut in early July in response to concerns about downward pressure) was gradual and modest, and failed to stabilize the growth mo-mentum as in previous policy episodes. We have pointed out that these developments reflect a shift in Chinapolicy framework from high-growth to high-quality growth, as well as the governments efforts to push for economic transfor-mation (from less productive to more productive investment, from high environmental cost sectors to green investment, from becoming rich to a balance between efficiency and equality), and the transitional pains during the policy regime shift were amplified by certain policy implementation prob-lems (e.g. lack of coordination, campaign-style excessive policy delivery). Such transitional pains amid policy regime shift will continue to be a difficult choicefor Chinese policymakers in 2022. Assuming that the government maintains similar separation between macro and industry policies as observed in 2H21, our growth forecast for 2022 stands at 4.7% (Figure 1.2), which we think will undershoot the governments growth target and potential growth. Whether policymakers will ad-just their policy responses is a key risk factor. In addition, housingmarket outlook, labor market conditions, possible credit quality deterioration in local government-related enti-ties, as well as the US-China relationship will all affect our assessment ofChinas economic outlook in 2022. Table: China economic indicatorsAverage2014-19 2020 2021f 2022fReal GDP, % change 6.7 2.3 7.8 4.7 Consumption 3.4 -0.5 5.3 3.1 Inv estment 3.5 2.2 1.7 1.5 Net trade -0.2 0.7 0.8 0.2Consumer prices, %oy a 2.7 2.5 0.9 2.2 % Dec/Dec 2.2 0.2 1.9 2.4Gov ernment balance, % of GDP -1.3 -3.7 -3.1 -3.0Merchandise trade balance (US$ bn) 455 515 613 597 Exports 2,232 2,497 3,099 3,255 Imports 1,777 1,982 2,487 2,658Current account balance 189 274 360 328 % of GDP 2.2 1.9 2.0 1.7International reserv es, (US$ bn) 3,254 3,239 3,271 3,3261. Contribution to grow th of GDP.Source: NBS; J.P. Morgan forecasts-12-10-8-6-4-2022020 2021 2022 2023%-pt deviation from pre-crisis potential pathFigure 1.1: Real GDPSource: J.P. Morgan Global EconomicsEM ex ChinaUSChinaDM ex US-2024611 12 13 14 15 16 17 18 19 20 21F 22F%-pt contribution to headline %oya growthFigure 1.2: Contribution to headline GDP growthSource: NBS, J.P. MorganNet exportsInvestmentConsumptionJ.P. Morgan forecasts3Economic ResearchGreater China 2022 Economic OutlookNovember 29, 2021JPMorgan Chase Bank, N.A., Hong KongHaibin Zhu(852) 2800-Grace Ng(852) 2800-Tingting Ge(852) 2800-Running the risk of undershooting growth targetThe government has de-emphasized the importance of its growth target in recent years, e.g. no numerical growth target in the 14th Five-Year Plan (FYP). But growth is still im-portant to achieve the double-GDP target by 2035 (which implies an average growth rate of 4.7% in 2021-35). In 2021, the government set a conservative growth target of above 6% to maintain the continuity in annual growth target. If the annual growth target follows a similar trend as in pre-pandemic years, it will very likely be set at 5.5%-6% in 2022 and then be further revised down gradually in the following years.However, we think achieving growth in the range of 5.5%-6% in 2022 will be quite challenging. Continuous below-trend growth in 2021 (and a significant contraction in 3Q21) implies that significant policy easing and a notable rebound will be required to meet the growth objective, yet stimulus-style easing is not desirable from either an economic or polit-ical perspective. Hence, a likely outcome is that the govern-ment may lower the annual growth target in 2022 to 5%-6%(Figure 1.3), and the current policy approach will only be fine-tuned to ensure a gradual stabilization towards potential growth. Economic transformation still a priorityThe economic slowdown so far in in 2021 was largely due to aggressive moves in economic transformation, including housing tightening, de-carbonization, tech regulation and education policy shocks. These industry policy changes rep-resent a major shift in policy regime that have emerged since 2017 and have manifested in serious actions this year. In the new regime, policy focuses on the quality of growth, for which innovation (or high productivity), green and common prosperity stand out as main features. With the mounting downward pressure, will the government relax or reverse these industry policies? We dont think so. A policy reversal would damage policy creditability or even compromise political leadership. Meanwhile, policy fine-tuning likely will take place to avoid unintended policy con-sequences. The approach to policy fine-tuning could be dif-ferent across industries. Fine-tuning in housing policy will aim to avoid tail risk sce-narios. Property slowdown is the biggest risk factor, asdisor-derly correctionsin the property market would lead to severe macro and financial market consequences (link). We think the property slowdown is not only cyclical, but also structural due to weaker housing demand (related to changes in demo-graphic structure, new marriages, urbanization and home ownership, etc.), more restrictive government policy and higher household debt. The bottom line is to avoid a policy-induced housing market collapse, hence normalization in mortgage loans, working-capital financing for property de-velopers and measures to ensure completion of unfinished projects could be anticipated. On the other side, the five red-lines (three for property developers, two for banks) will con-tinue to be implemented, property tax will be expanded tomore cities (though further delayed at national level for at least five years), and most administrative and macro-prudential measures (e.g. LTV requirements, home purchase restrictions, differentiated mortgage rates) will not be re-laxed, suggesting that housing market activity will further weaken before stabilizing at a lower level (Figure 1.4).Fine-tuning in decarbonization policies will aim to avoid excessive policy implementation (so-called campaign-style de-carbonization) and mitigate temporary disruption in ener-gy supply and energy prices. We think the policy objective of supporting green sectors and restricting high energy-consuming sectors will stay on course. On the positive side, we expect the power shortage observed in late 3Q21 will ease, driven by weaker energy demand and a pick-up in elec-tricity supply(Figure 1.5), and normalization in economic structure (from high energy intensity to low energy intensity 24681012141698 00 02 04 06 08 10 12 14 16 18 20 22F%oyaFigure 1.3: China real GDP growth vs. governments growth targetSource: NBS, J.P. MorganGovernments growth targetReal GDP growth JPMforecastNo target in 2020-30-15015304560752015 2016 2017 2018 2019 2020 2021%oya, 3mmaFigure 1.4: Real estate FAI, floor space started and floor space soldFloor space soldFloor space startedReal estate investmentSources: NBS; J.P. Morgan4Economic ResearchGreater China 2022 Economic OutlookNovember 29, 2021JPMorgan Chase Bank, N.A., Hong KongHaibin Zhu(852) 2800-Grace Ng(852) 2800-Tingting Ge(852) 2800-sectors) will reduce the difficultyin achieving the annual target for energy consumption intensity reduction in 2022. Tech regulation will be introduced in the second half of2022. Throughout 2021, the government rolled out a series of regulatory changes in new economy sectors, e.g. Fintech reg-ulation, anti-trust rules, ban on profit-making academic tutor-ing for K9 education, data regulation and data privacy, etc. In 2022, we expect policy focus to be on implementation. Regu-latory changes aim to develop a healthy and sustainable growth environment for new economic sectors, to balance profit-taking and social responsibility, and also to address national security considerations. Market participants will need to adjust their business models in response to regulatory changes, but the most volatile period might be behind us. 2022 economic outlook largely depends on how much macro policies will be adjusted. A shift towards more aggressive fiscal and monetary easing will lead to a stronger rebound in growth momentum and upside risk to our current forecasts. However, we expect the macro policy will broadly track the path in 2H21, i.e. neutral rather than significant policy eas-ing. The neutral policy stance is in part due toa reluctance to introduce stimulus, and in part due to constraints from the separation between macro and industrial policies. In summary, continuous structural transformation implies that divergent performance across industries will continue into 2022. The desirable sectors supported by the government include manufacturing upgrade, green investment and rural area development, while housing, infrastructure and de-carbonization affected industries will continue to under-perform(Figure 1.6). In particular, we expect FAI growth will soften from 4.2% in 2021 to 2.3% in 2022, of which manufacturing FAI will continue to outperform (8.0% in 2022), real estate FAI will be the worst performer (-5.2%) and soft infra-FAI in between (0.8%).Fiscal policy: A much smaller fiscal drag, but not a fiscal stimulus Excessive tightening in fiscal policy implementation was a policy surprise in 2021. The NPC-approved fiscal budget incorporated a modest fiscal tightening, namely fiscal deficit within the budget was lowered from 8.51 trillion yuan in 2020 (including 3.76 trillion deficit, 3.75 trillion special local government bond and 1 trillion special covid-19 bond) to 7.22 trillion yuan in 2021 (including 3.57 trillion deficit and 3.65 trillion special local government bond). In practice, the quota of special local government bond was lowered modest-ly to 3.468 trillion yuan, and the issuance of government bond was significantly back-loaded: in the first three quar-ters, only 77% of the local government bond quota and 40% of central government bond quota were utilized, leading to faster-than-expected TSF deceleration (which includes gov-ernment bond issuance) and weak infra-FAI (which is linked to special local government bonds). In addition, fiscal reve-nue growth significantly outpaced the full-year budgetary increase in the first 10 months (14.5% vs. 8.1%) while fiscal expenditure growth was on track (2.4% vs. 1.8%), leaving ample fiscal space under-utilized. We estimate that, if includ-ing off-budgetary fiscal items (slowdown in LGFV and net land sales), 2021 fiscal policyregistered a notable drag of 3.6% of GDP, largely reversing the 4.6% of GDP of fiscal stimulus in 2020. -8-6-4-2024685 90 95 00 05 10 15 20Figure 1.5: Energy/electricity consumption intensityEnergy Electricity%oyaSource: NBS, China Electricity Council, J.P. Morgan60708090100110120Dec 19 Jun 20 Dec 20 Jun 21Total FAIMfg FAIInfra FAIReal estate FAIIndex, 2019M12=100 (SA)Figure 1.6: China FAI compared to pre-pandemic levelSource: NBS, J.P. MorganChina fixed assets investment by industry%oy a% share 2020 2021 20222021 vs. 201912022 vs. 20191Total FAI 100.0 2.9 4.2 2.3 3.6 3.1Manufacturing 30.7 -2.2 12.8 8.0 5.0 6.0Infrastructure 22.7 0.9 0.2 0.8 0.6 0.6Real estate 17.4 7.0 4.9 -5.2 6.0 2.1Source: NBS, J.P. Morgan. Note 1: Annualized grow th rate v s. 2019.5Economic ResearchGreater China 2022 Economic OutlookNovember 29, 2
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