Box 13. China’s growth in 2022: between shocks and stimulus

Box 13. China’s growth in 2022: between shocks and stimulus

This box explains China’s growth projections for 2022. It presents the estimated impact of the twin shocks related to the war in Ukraine and the pandemic resurgence. it then presents the estimated impact of the government’s fiscal stimulus and concludes with presenting the potential net impact of the all these factors.

The analysis rests on the following assumptions:

• COVID-19 resurgence: the current COVID-19 outbreak will be brought under control within two months and will largely affect the demand side with a limited impact on production.

• Terms of trade and external demand shock: China will experience a deterioration in its terms of trade and will face a significant slowdown in global growth which will impact economic activity from 2022Q2 onwards.

The impact of these combined shocks on economic growth is significant. Simulations suggest that these shocks could shave off around 1.6 percentage points from the earlier 5.1 percent baseline projection in 2022, unless counteracted by additional offsetting stimulus (figure B13.1A.). Estimates show that around 0.9 percentage point of this 1.6 percentage point decline is due to the terms of trade shock, 0.3 percentage point is owed to the slowdown in global growth, which is expected to weigh on manufacturing investment growth, and the remaining 0.4 percentage points are related to the negative impact of the COVID-19 resurgence and the associated mobility restrictions and impact on the demand for services.7

in the face of these shocks, the authorities have announced a significant loosening of policy, deploying available policy space after last year’s tightening. The previous baseline growth forecast included the assumption of a moderate fiscal loosening (by around 40 bps of GDP).

The 2022 budget goes beyond this expectation and leaves room for a fiscal impulse of up to 2.7 percent of GDP (figure B13.1B) – 2.3 percent of GDP more than expected in the previous baseline. This does not mean that policymakers will necessarily fully exhaust the fiscal impulse. in previous years, there were large deviations between targets and actual outturns. For instance, fragile local government balance sheets, weak land and real estate markets, and the lack of shovel-ready projects may constrain the execution of fiscal stimulus.

7 We examine the effect of the different shocks on growth by applying a Structural Vector Autoregression (SVAR) model with a Cholesky decomposition. All variables are seasonally adjusted, HP filtered monthly data. On the COVID shock, we use the loss in GDP in 2020Q1 as the main reference. For the services sector, we assume that the growth impact of the current COVID outbreak on cities with medium and high-risk districts would account for about one-third to two-third of the magnitude of the GDP loss in 2020Q1. For the industry sector, we assume only cities in lockdown would be impacted by the same magnitude of growth impact.

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