Main Points:

China's economic growth is expected to slow in 2022. China's economy got off to a good start in early 2022, but the coronavirus pandemic, the largest in two years, has since disrupted the normalisation of growth. Real GDP growth is expected to slow sharply to 4.3 per cent in 2022, 0.8 percentage points lower than the December China Economic Brief forecast. The decline mainly reflects the economic damage caused by the Omicron outbreak in March and May this year and the prolonged lockdown in parts of China. Growth momentum is expected to rebound in the second half of the year thanks to aggressive policy stimulus to ease the economic downturn.

Risks to China's economic growth outlook are uneven, with the following risks dominating. If a new variant of the highly contagious coronavirus reemerges, it could disrupt the economy for longer. As discussed in the special section of this issue of China Economic Brief, continued stress in the property sector could also pose risks, with wider implications for the economy as a whole. China's economy is also vulnerable to risks related to the global growth outlook. On the upside, if the pandemic is contained and domestic restrictions are lifted, full-year growth could be higher than currently expected on the back of recently announced additional stimulus measures.

In the short term, China faces the twin challenges of containing the pandemic and supporting economic growth. The government has stepped up macroeconomic policy easing, such as expanding public spending, increasing tax rebates, lowering policy interest rates and easing property controls. While China has the macro policy space to respond to slower growth, the dilemma for policymakers is how to ensure that policy stimulus is effective while controls persist. Repeated outbreaks have increased economic uncertainty, weighed on private investment and consumption, and reduced the effectiveness of stimulus policies.

China could return to borrowing to invest in infrastructure and real estate to fuel growth. This growth model is ultimately unsustainable, and many companies and local governments are already highly indebted. Policymakers could consider shifting more stimulus onto the central government's balance sheet and directing more public investment towards green public infrastructure. Fiscal policy could also target measures that directly encourage consumption, such as the wider use of consumer vouchers, which could increase spending in areas that have already relaxed pandemic controls. Decisive action to increase the role of consumption in economic growth, address social inequalities, and reinvigorate innovation and productivity growth -- including the technological innovations that are critical to China's dual carbon goals -- will help put China on a more balanced, inclusive and sustainable growth path.