China: Qoq growth firms in Q4, PBoC adds piecemeal easing

China Macro: Quarterly growth picks up in Q4.

This morning China’s GDP data for Q4 and activity data for December were published. In line with our expectations, China’s quarterly GDP growth picked up materially in Q4, to 1.6% qoq (ABN AMRO: 1.8%, consensus: 1.2%, Q3: revised up to 0.7%). The recovery of the growth momentum in the final quarter of this year mainly stems from the production side of the economy (see next paragraph), while consumption and real estate continue to be weak spots. Mainly due to revisions in previous quarters, annual growth in Q4 came in higher than expected, at 4.0% yoy (ABN AMRO: 3.4%, consensus: 3.3%). Still, this number marks the weakest annual growth rate since the first half of 2020, when China was hit by the initial covid-19 shock. What is more, Omicron (in combination with China’s strict covid-19 policies) poses additional risks to China’s growth rate – and to global supply chains. We are in the process of reviewing our growth forecasts for 2022 (currently 5.3%) and 2023 (currently 5.2%) and will publish our revisions later this month in our Global Monthly.

December data show divergence between production and consumption

December activity data confirmed the ongoing divergence between the production and the consumption side of the economy. Industrial production growth came in stronger than expected and accelerated to a four-month high of 4.3% yoy (November: 3.8%, consensus: 3.7%). That illustrates that supply side disturbances stemming from a power crunch in September/ October and from strict covid-19 policies had faded in the second half of last year. Earlier this month, China’s manufacturing PMIs had also pointed to an improving momentum. Fixed investment also came in slightly better than expected, at 4.9% for the full year (consensus: 4.8%, Jan-Nov: 5.2%), with a moderate easing of fiscal policy helping to offsets drags from the property sector. The big disappointment came from retail sales, which slowed to a 14-month low of 1.7% yoy (consensus: 3.8%, November: 3.9%), and contracted by 0.2% on a monthly basis. This reflects a drag from a winter virus outbreak, but also the impact from a drop in CPI inflation (see our previous comment on Chinese inflation here). All in all (with export growth remaining solid), Bloomberg’s GDP growth estimate improved for the third consecutive month, to 4.9% yoy.

Piecemeal easing continues

With drags from Omicron and real estate prevailing and inflationary pressures fading, China’s piecemeal easing approach continues, in line with our expectations. Today, the PBoC lowered the policy rate for its 1-year Medium-Term Lending Facility (MLF) by 10 bp, to 2.85%, the first cut since April 2020. The PBoC also cut its 7-day reverse repo rate by 10 bps, to 2.10%. Last month, the PBoC cut the reserve requirement ratio (RRR) for banks by 50 bps, while the 1-year Loan Prime Rate was lowered by 5 bp, to 3.80%. We expect piecemeal monetary easing to continue in the coming months, with further mini cuts in policy rates and another 50 bp reduction in bank RRRs. After the reduction of the MLF rate, we now expect a further mini cut of the 1-year Loan Prime Rate coming Thursday,