How Will China's Economy Overcome Its Covid Setbacks?
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How Will China's Economy Overcome Its Covid Setbacks?

With top policymakers maintaining their original 2022 economic target, FAI (especially infrastructure) is likely to become the primary driver to stabilise economic growth. Fiscal policy will likely take the lead, supported by  possible special sovereign bonds on top of local special bonds set to complete issuance in June. Property relaxation will remain the policy focus.

On the supply side, value-added industrial and manufacturing output dropped at the worst since March 2020. On the demand side, total retail sales slumped to the deepest contraction since March 2020. Catering and auto retail sales – the two most significant components, declined by over 20%.

Meanwhile, exports, which had shown significant resilience in the past two years, rose only 3.9% YoY in April, the slowest pace since June 2020, as the latest lockdowns in the major manufacturing hubs disrupted production and supply chain, hurting exports.

Looking beyond the recent weakness, we believe that heavy duty truck demand is likely to improve from potential stronger infrastructure FAI. Meanwhile, possible construction acceleration post lockdown could lead to a release of pent-up demand for construction machinery, despite a less optimistic medium-term outlook.

We believe the second quarter could support new orders/top line/net profit growth for construction companies, following robust growth in this year's first quarter, despite lockdowns in select areas.

Better Infra FAI is helpful for the railway equipment sector, but the continuous low traffic still casts a shadow near term. Potential more robust infrastructure spending could benefit cement company margins and their supply discipline. Steel margins could benefit from production decline, by capping rising raw material costs and stronger demand support from a more substantial government commitment to infrastructure investment.

@Edmond Huang