We downgrade our 2021 growth forecast on delta, to 8.3% …

Over the summer, Beijing’s zero tolerance approach towards new (Delta) outbreaks – aimed at eliminating all cases – formed a clear headwind for economic activity, with particularly the services sector being affected.

The tightening of mobility restrictions and the re-imposition of regional lockdowns right in the middle of the typical travel season obviously left its mark (see our August Global Monthly for more background on China’s strict approach).

China’s services PMIs for August dropped sharply below the 50 mark. That was for the first time since the initial covid-19 shock in Q1-2020, although back then the drop in the PMIs was much sharper. Meanwhile, China’s manufacturing PMIs for August also continued their downward slide, with Caixin’s indicator now falling below the neutral mark (49.2) for the first time since April 2020. This partly reflects bottlenecks such as a scarcity in semiconductors hitting car production.

We expect China’s services PMIs to bounce back in the coming months, as overall restrictions will be eased to some extent (notwithstanding a new outbreak in Fujian). We now expect hardly any quarterly growth in Q3. We anticipate this to be followed by some payback and a pick-up in Q4, assuming further piecemeal support (see below) and with China reaching herd immunity by year-end (according to the National Health Commission). As a result of all this, we have cut our 2021 growth forecast to 8.3%, from 9.0%.

Beijing continues with piecemeal easing

On the regulatory front, over the past months policy makers intensified and broadened a crackdown versus fintech firms and online platforms, bitcoin and sectors which do not contribute to the goal of common prosperity in the eyes of Beijing (such as online education and entertainment/gaming).

The government had also tightened conditions for shadow banking and property developers for some time, with the property giant Evergrande now close to defaulting. We expect the authorities to strike a balance between fighting moral hazard and safeguarding financial stability.

Meanwhile, on the macroeconomic policy front, the government has already switched bank to piecemeal easing, following the recent slowdown of the Chinese economy. In July, the PBoC cut the reserve requirement ratio (RRR) for banks by 50 bps. The PBoC has also implemented special liquidity operations aimed at supporting bank loans to SMEs. A moderate fiscal easing is visible as well, with the issuance of local government bonds being on the rise. We expect this piecemeal easing approach to continue and have pencilled in another 50bp RRR cut for the rest of this year.