4 Jan 2022

  •  Beijing to stick to Covid Zero approach amid major events
  •  Goldman expects another RRR cut for banks in the first quarter

China could maintain its border restrictions for the rest of the year as it prepares to host the Winter Olympics and a series of political events in 2022, Goldman Sachs Group Inc. said.

Reports that vaccines made by domestic firm Sinovac Biotech Ltd. offer limited protection against the omicron variant will likely reinforce China’s resolve to stick with its Covid Zero strategy, analysts led by Andrew Tilton wrote in a note Tuesday. 

China is one of the few countries in the world that’s still committed to the Covid Zero approach, while many others have shifted toward living with the virus. Strict measures to contain outbreaks — like the hard lockdown in Xi’an currently — have led to disruptions to production and travel, and a slump in consumption, adding pressure on an economy already weighed down by a housing market slump.

Quarantine requirements on travelers arriving from abroad could be kept in place to avoid major disruption to the Winter Olympics, which will begin next month, the annual meeting of the national legislature in March, and the 20th Communist Party Congress in the fourth quarter, Goldman said. President Xi Jinping is expected to secure a precedent-breaking third term during the once-in-five-year party event. 

Beijing has vowed to shift its policy focus this year to stabilizing economic growth from preventing risks, as it warns of a triple whammy of contracting demand, a supply shock, and weakening expectations. 

The central bank last month boosted liquidity by cutting the amount of cash lenders must keep in reserve. The authorities have also said they will better meet what they term as “reasonable demand” for homes as they move to limit the fallout from a widening debt crisis engulfing the country’s real estate industry.

Goldman expects another reduction in the reserve requirement ratio in the first quarter, with easing focused on credit and fiscal measures cushioning but not fully absorbing the downturn in the housing market.

The yuan could see “small further gains” to 6.2 per dollar by the end of this year as China maintains a “meaningful” current account surplus, the analysts said. Also helping the Chinese currency would be solid net portfolio inflows driven by index inclusions and a potential acceleration in equity purchases by foreigners with domestic stocks likely performing better this year than last, they added.

— With assistance by John Liu, and Fran Wang