Citi raises its forecast for China’s GDP growth

Citi raises its forecast for China's GDP growth

According to Moody’s, real estate and related sectors account for at least 25% of China’s economy.

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BEIJING — China’s economy is facing so much new pressure from Covid that Beijing could increase stimulus – boosting overall growth, Citi said on Thursday.

“Given the strong start to the year and expected government support, we are revising our growth forecast to 5.0% for 2022 from 4.7%,” Xiangrong Yu, Citi’s chief China economist, said in a report late Thursday.

The new forecast is closer to the official target of around 5.5% for gross domestic product that was announced in early March. For January and February, China reported better-than-expected growth in retail sales, fixed investment and industrial production.

According to the report, the increase in Citi’s GDP forecast was due to investments in projects such as infrastructure and affordable housing.

The official Purchasing Managers’ Indices – which measure market conditions – for manufacturing and service companies both fell into contraction territory in March. This is the first time both indices have done so since February 2020.

“The current Omicron wave is the worst outbreak since Wuhan, but its impact on PMI appears to be smaller than the severity of the outbreak suggests,” Yu said Thursday. “The data shows that the impact of containment measures is significant on demand and services, but milder on manufacturing and construction.”

“China [is] Adjusting to minimize economic costs while implementing the ‘dynamic zero Covid’ policy,” he said.

In March, China faced the worst wave of Covid-19 since the pandemic first shocked in 2020. Major cities like Shanghai and Shenzhen have had to impose lockdowns and quarantines to control outbreaks of the highly transmissible Omicron variant.

The Caixin Manufacturing Purchasing Managers’ Index, an independent study that covers more smaller companies than the official survey, also fell into contraction territory in March and to its lowest level since February 2020, data released on Friday showed.

Support for the real estate industry

One of the actions Yu expects from policymakers is support for the struggling, massive real estate industry. Beijing cannot afford to wait any longer for efforts to stabilize the real estate market with measures such as looser credit policies, he said.

Home sales have plummeted in recent months as Beijing reined in developers’ heavy reliance on debt for growth. According to Moody’s, real estate and related sectors account for at least 25% of China’s economy.

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Yu and other economists also expect the People’s Bank of China to cut interest rates, or the amount of reserves banks are required to hold, this month.

“China [has a] very ambitious growth target to be achieved by the end of the year,” said Carlos Casanova, senior Asia economist at UBP, on CNBC’s Capital Connection on Thursday.

“If they fail to implement another round of rate cuts in April,” he said, “unfortunately that’s bad news because that 5.5% [goal then] would be very difficult to achieve.”