China is headed for recession: the macroeconomics of the pantheon

  • Beijing takes one step closer to full lockdown
  • Pantheon Macroeconomics sees recession in China
  • “Real” GDP growth will be just over 2.0% in 2022
  • USD/CNY will reach 6.8 by the end of the year

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As another Chinese megacity approaches a full-scale lockdown, economists are increasingly of the view that a substantial slowdown in the world’s second-largest economy is underway.

It was reported on Tuesday that Beijing extended its mass Covid-19 testing from one district this week to the majority of the city’s 22 million people, suggesting an impending lockdown similar to Shanghai’s looms.

Economists at independent research consultancy Pantheon Macroeconomics warn that a sharp Covid-induced downturn is now well underway in China due to stubborn adherence to zero Covid policies.

“We believe the official data overestimates the strength of growth and, in any event, only captures the beginnings of the Covid zero-induced slowdown,” says Craig Botham, chief China economist at Pantheon Macroeconomics.

The decision to expand testing in Beijing comes after authorities reported only 33 new locally transmitted cases, but similar measures were only implemented in Shanghai when more than 1,000 cases were identified.

On the contrary, it might suggest that authorities in Beijing are pursuing the zero Covid approach with extra zeal.

Pantheon Macroeconomics says that for China to meet its 5.5% growth target this year, “at least one key policy objective must be abandoned: either debt will have to rise significantly as a percentage of GDP, or zeroCovid will have to be abandoned,” says Botham.

“All signs point to the former, with Shanghai doubling down on restrictions in April, and Covid cases now on the rise in Beijing,” he adds.

China’s economy grew 4% year-on-year in the last three months of 2021, compared to 4.9% in the previous quarter.

Looking ahead, the new median forecast among nine financial companies tracked by CNBC calls for Chinese GDP growth of 4.5% for the full year.

Pantheon Macroeconomics, however, warned that the Chinese economy was heading into recession.

“We expect growth to slow further in the second quarter, amounting to a recession, according to our GDP estimate,” Botham said.

Chinese GDP Estimates


Pantheon Economics predicts “real” growth of 2.5% and 5.0% in 2023 for the year 2022, while official figures should reflect 4.2% and 5.0% respectively.

Ernan Cui of Gavekal Dragonomics, a consulting firm in Beijing, estimate that nearly three-quarters of China’s 100 largest cities, accounting for more than half of the national GDP, are enforcing Covid-related restrictions.

As the economy comes under intense pressure, so does the currency.

The renminbi has suffered in recent days a sharp depreciation of 3% to 6.55 against the dollar in recent days.

“We warned of a turbulent Q2 for the renminbi, and the currency has duly delivered, depreciating 3.2% against the dollar since the start.
April, the biggest move since 2018. Pressure continues to mount on the capital flow front,” Botham said.

He says the interest rate differential between China and the United States, as measured by three- and ten-year government bond yields, has turned negative for the first time since the global financial crisis.

“Trade flows are expected to erode further and will not give the same boost as in 2021,” Botham says.

Pantheon Macroeconomics predicts that the RMB will reach 6.8 to the dollar by the end of the year, with risks mainly on the downside.

CNY Pantheon Exchange Rate Forecast


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