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The economy seems to gradually recover in May as the lockdown measures in Shanghai came to an end and the authorities have pressed ahead with monetary and fiscal stimulus measures.
The first half of 2022 is fraught with negative shocks to the Chinese economy. The default of Evergrande Group, mounting geopolitical risks concerns and the sweep of Omicron variant etc. not only brought strong headwinds to economic growth but also resulted in the deterioration of China’s financial vulnerabilities.
Chinese authorities not only prioritized economic growth in 2022 but also promulgated a series of stimulus measures in monetary and fiscal perspectives with actions.
Chinese authorities face the “Impossible Trinity” of policy setting in 2022 among “zero tolerance” COVID policy, synchronized monetary policy and 5.5% growth target.
A series of global and domestic macro fundamentals drove recent sharp RMB depreciation. We do not think it will lead to systematic financial instability risk as it is synchronized with depreciation of other currencies amid FED tightening measures. The PBoC has counter-cyclical tools to maintain the RMB exchange rate stable.
The low inflation environment in China during the past two years when China “first-in, first-out” of the pandemic while the rest of the world was grappling against the coronavirus has started to bear some changes recently with the CPI trending up.
We analyze the underlying macro reasons behind the recent RMB exchange rate sharp depreciation and explain our forecast of RMB till year end.
China’s economic outlook of this year has been largely changed from its previous policy-led softlanding story by the recent flare-ups of Omicron and particularly Shanghai’s lockdown. However, this adverse spillover effect has not yet been fully reflected in Q1 GDP.