After an unparalleled tightening in 2021, we expect an aboveconsensus economic recovery to 5.5%Y in 2022 amid policy easing, led by public capex and a gradual consumption revival.

An unparalleled tightening in 2021: China has orchestrated its most far-reaching tightening in 2021 to ensure more sustainable long-term growth. The unprecedented stimulus elsewhere in the world and strong global trade essentially helped Beijing to withdraw policy support. Policy-makers also initiated a wide-ranging regulatory tightening on property, carbon and tech sectors. In turn, China's debt/GDP registered a record annual decline of 10ppt, and GDP growth slipped to a 4.9% 2Y CAGR in 2H21, posing a job market risk.

Policy to reverse the recent sharp slowing: The below-trend growth has prompted Beijing to hit a pause to balance growth and debt management. We expect a clear policy shift toward counter-cyclical easing, featuring a slightly wider augmented fiscal deficit in 2022 with a corporate tax cut, pro-consumption measures, and green infrastructure boost. Coupled with monetary easing including an RRR cut, it could lift broad credit growth to ~11.5% YoY by mid-2022 (vs. the recent trough of 10.2%). We also see the regulatory reset transitioning to a more institutionalized stage with an overarching framework.

Growth to accelerate, above consensus expectations: We expect GDP to accelerate to 5.5%Y in 2022 (from ~4.9% 2Y CAGR in 2H21), returning to its potential growth rate. Stronger infrastructure and manufacturing investment amid policy easing and a green economy push should outweigh a further slowdown in property investment. Private consumption growth may also improve modestly, albeit still below pre-Covid trend amid “Zero Covid" strategy.

Export growth may moderate but remain robust, resulting in a resilient current account surplus (1.5% of GDP) and keeping USDCNY stable at 6.4 toward end2022.

Rising core inflation: Core CPI will likely pick up to ~2%Y in 2022 (vs. 0.8%Y in 2021) amid a gradual consumption recovery. PPI could stay elevated at ~12%Y in 1Q, in light of continued production controls over energy-intensive upstream sectors, followed by a moderation to 5-6% in 2H as a high base kicks in.

Downside risks prevail; policy path the swing factor: In a demand-side bear case with a more aggressive and less coordinated regulatory reset, housing spillover, and more frequent Covid-19 outbreaks, growth could slip 100bps more than the base case to 4.5%. In a supply-side bear case triggered by broader and more persistent power crunch, growth could slow by 80bps to 4.7%, and CPI inflation could rise to 2.6% (100bps higher than base case), constraining broad-based policy easing. In our bull case of reduced supply bottlenecks, GDP growth could reach 6.2% in 2022, 70bps higher than the base case.