The value of the dollar has risen sharply, it’s time for a change! The return of the Chinese economy and the yuan to the game! Economic Forecasts and Currencies

The epidemiological situation in China worsened significantly in March and April. Thus, due to the Chinese government’s “zero COVID” policy, administrative restrictions have been applied since March to more than 50 major cities from the point of view of Chinese industry and commerce, including Shanghai, which accounts for a total of about 40% of China’s GDP. . This had a strong negative impact on economic activity in China, which was especially evident in the data on retail sales, industrial production and foreign trade (see, among other things, the MACRO map of 05/16/2022). The deterioration of the epidemiological situation in China was also reflected in the intensification of the problem of supply barriers in world trade (see MACRO map of 05/09/2022). The Covid shock recorded in March and April in the Chinese economy is on the demand side (low demand due to reduced movement) and the supply side (production breaks and supply chains disrupted). This is well evidenced by the results of economic surveys in Chinese processing, which showed a decrease in orders and an extension of delivery times.

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In recent weeks, an improvement in the epidemic situation has been observed in China, accompanied by a gradual easing of administrative restrictions and a gradual increase in economic activity. Such an assessment is supported by data on Chinese society’s growing mobility (including data on traffic and transportation), which is slowly returning to levels before the restrictions were imposed. In our scenario, we assume that this trend will continue in the coming weeks, which will support the recovery of economic activity in China. However, the pace of easing restrictions will be constrained by the aforementioned “zero COVID” policy of the Chinese government. In our opinion, it will be preserved at least until early October and November, when the Twentieth Congress of the Communist Party of China will take place. We believe that decisions may be made to gradually move away from this policy in order to reduce the economic costs of the epidemic, which will be supported by the progress of the Chinese pharmaceutical industry in the development of drugs and mRNA vaccines for COVID19 and the incremental increase. The degree of vaccination of the population.

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The improvement of the epidemic in China supports the economic growth scenario in that country. In our scenario, we assume that the pace of China’s economic growth will slow in the second quarter to 1.5% y/y versus 4.8% in the first quarter, and then, as the epidemic situation improves, it will accelerate in the third and third quarters. And in the fourth quarter it will accelerate. up to 4.5% and 5.0%, respectively. As a result, during 2022, the dynamics of GDP will decrease to 4.0% compared to 8.1% in 2021, and in 2023 it will reach 5.5%. As a result, we believe that China’s economic growth target for 2022, which has been set at around 5.5%, will be difficult to achieve even under conditions of active economic policy implemented by the Chinese government.

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In the context of monetary policy, we believe that the People’s Bank of China will maintain its dovish stance as it focuses on lending support. Last week, the People’s Bank of China also decided to cut the 5-year LBP rate by 15 basis points, the benchmark rate for mortgage loans, in response to sluggish housing demand in China. In the coming months, we expect further easing in monetary policy (by the end of 2022 we expect a reduction in the 1-year LPR – the loan prime rate, that is, the one-year interest rate on short-term loans granted to customers with the highest ratings., by 10 basis points and a reduction Required reserve ratio of 25-50 basis points). It is also worth noting that monetary policy in China has a more and more sectoral character, which is its own relaxation of strategy, from the point of view of China’s economic policy, and areas of the economy (such as processing, transportation, energy, environmental protection, agriculture, building rental apartments, urban infrastructure and industrial, digitization).

In the case of fiscal policy, we expect an acceleration in infrastructure investments, tax breaks for sectors affected by the pandemic, and domestic subsidies for households. In terms of the real estate market, we expect to continue activities aimed at supporting the demand for properties for private housing purposes (including preferential financing for people buying their first apartment or reducing their own contribution), as well as helping the development industry to access financing, debt restructuring and consolidation. Appropriate calibration of monetary, macroprudential and financial policies in the real estate market is aimed at preventing a debt crisis in this sector due to strong speculative demand in previous years, on the other hand, enabling households to have access to buying / renting real estate for their housing purposes.

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Due to divergent trends of monetary policy in China and the United States, the disparity in interest rates between China and the United States is decreasing. This is a factor affecting the flow of capital from China to the United States, limiting the chance of a decline in the rate of the US dollar against the Japanese yen as the epidemic situation in China improves. As a result, we expect that the exchange rate of the US dollar against the Japanese yen at the end of 2022 will reach 6.70 and at the end of 2023 – 6.50. The decline in the price of the US dollar against the Japanese yen in 2023 will support the improvement in the outlook for economic growth in China. Taking into account the strengthening of the zloty expected by us against the dollar, it means that at the end of 2022 the price of PLNCNY will be 1.66, and at the end of 2023 it will rise to 1.70.

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