China slowdown is triggering policy recalibration, says Fitch

China’s economy has lost momentum in recent months, prompting a recalibration of policy settings to support activity, Fitch Ratings said.

The country has sustained robust growth during much of the coronavirus pandemic, but headwinds have recently emerged on numerous fronts, challenging our baseline forecast that China’s economy will grow by 8.4% this year and 5.5% in 2022.

Threats to the outlook became evident after efforts to extinguish a modest wave of Covid-19 cases in July-August resulted in widespread – albeit temporary – mobility restrictions, Fitch said in a note, adding that these events have coincided with a retrenchment in the property sector, a key growth driver for China’s economy, where construction has slowed partly as a result of policies seeking to limit leverage among developers, curb speculative housing purchases and contain property price inflation.

According to Fitch, investment is also under pressure more broadly. Fixed asset investment contracted by 1.2% yoy in July, based on our estimates, led by a sharp decline in infrastructure spending. Infrastructure was a critical component of the government’s fiscal stimulus package during the initial stage of the pandemic, but has fallen y-o-y since April as policy support has faded and local governments have fallen short on their issuance quotas for infrastructure-linked bonds, Fitch pointed out.

It said other parts of the economy appear unlikely to make up for the weakness in investment in the near term. “Consumer sentiment has been shaken by the recent Covid-19 outbreak, although household spending should still grow robustly in 2021. On the external side, exports surged by 35.2% yoy in 7M21, but we expect their growth to slow over the next few months as overseas demand returns to more normal patterns. This will diminish the external sector’s catalytic role in China’s pandemic recovery, following its outsized contributions in recent quarters,” it added.

Responding to the shift in growth momentum, Fitch said, Chinese policymakers are no longer signalling that they intend to gradually normalise economic policy settings. The case for macro policy easing may also have been reinforced by recent regulatory developments, such as a crackdown on internet-oriented technology enterprises and a more selective approach to supporting government-related entities, which have unsettled the confidence of many investors.

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