Category Archives: Economy

China’s Modest Manufacturing Pick-Up Will Not Gain Momentum

THE CAIXIN SERVICES purchasing managers index (PMI) hit its highest level in nearly a year in June at 54.5, following the rebound in the manufacturing PMI to 51.7, its highest level since May 2021, after four months of decline.

A PMI reading above 50% indicates expansion; The Caixin index focuses on smaller and medium-sized firms, while the official PMI tracks larger, typically state-owned companies.

While the easing of lockdowns, including in Shanghai, will have boosted the services PMI, June’s uptick in the manufacturing reading stood in contrast to a slowing of manufacturing output in the United States, the United Kingdom, Japan, India, ASEAN and Brazil, and contraction in the euro-area and South Korea.

However, China’s manufacturers will not be immune to the adverse impacts of the conflict in Ukraine and tighter monetary policies to rein in inflation will erode global market conditions. China’s manufacturing output will slow in the coming months, even if less sharply than elsewhere.

Relatively weak growth will likely continue for the rest of the year in the face of strong external and internal headwinds. These range from worsening US-China tensions to President Xi Jinping’s doubling down on the zero-Covid-19 policy. These are buffeting domestic economic activity, which was already slowing, and global supply chains already under strain.

If China gets away with fewer lockdowns — and softer ones — it should see manufacturing, consumption and investment pick up. There will be continuing monetary and fiscal stimulus to bolster private spending and employment, both critical to the twin goals of growth and social stability.

The risk remains old-school investment spending, which could fuel financial instability, especially in the still beleaguered property sector. The government announced an extra $120 billion of lending for infrastructure by state policy banks at the start of June and a further $80 billion via bond issuance at the end of the month.

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China’s Trade Picks Up As Lockdowns Ease

Daily throughput at Shanghai’s container port returned to 95.3% of normal levels in late May, even as China’s commercial capital remained under its two-month lockdown. That goes part of the way to explaining May’s rise in exports, up 16.9% year-on-year that the General Administration of Customs announced today, a marked improvement on April’s 3.9% growth.

Imports rose by 4.1% year-on-year in May, after being flat in March and April, but still a weak pace reflecting the broader second-quarter slowdown in China’s economy as lockdowns suppressed economic activity.

News that the Biden administration is looking to ‘reconfigure‘ tariffs on Chinese imports into the United States to help reduce inflation will boost Chinese exporters but insufficiently to offset the headwinds of slowing global GDP and trade entirely.

Import growth will also remain modest, even as lockdowns ease and authorities provide further fiscal and monetary stimulus to support the domestic economy.

However, lockdown easing is not the same as lifting. New measures were announced for one Shanghai district today and it looks, nationally, as if the country’s anti-virus infrastructure is continuing to be built out so that mass testing and quarantines can be sustained through 2023.

During his inspection tour of Sichuan, President Xi Jinping called for unwavering adherence to its zero Covid policy while at the same time striking a balance with the needs of the economy. His grouping of economic recovery, pandemic outbreak suppression and maintenance of social stability as co-objectives for officials particularly caught this Bystander’s ear.

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World Bank Lowers China Growth Forecast

The World Bank's Global Economic Prospects, June 2022 update cover page

THE WORLD BANK has cut back its forecast for China’s economic growth this year by 0.8 of a percentage point to 4.3%.

The revision to its forecast in January comes in the latest update to its Global Economic Prospects report.

The Bank forecasts 5.2% growth next year and 5.1% in 2024. Its revision for 2023 is only a 0.1 of a percentage point reduction.

The World Bank is usually among the more optimistic forecasters of China’s GDP growth. A projection for this year so below the official target of 5.5% growth underlines the severity of the economic headwinds China faces; not that many expect the official target to be hit.

The Bank expects the global economy to slow to 2.9% growth this year and not rebound next.

Following more than two years of pandemic, spillovers from the Russian Federation’s invasion of Ukraine …. is leading to high commodity prices, adding to supply disruptions, increasing food insecurity and poverty, exacerbating inflation, contributing to tighter financial conditions, magnifying financial vulnerability, and heightening policy uncertainty… Moreover, the outlook is subject to various downside risks, including intensifying geopolitical tensions, growing stagflationary headwinds, rising financial instability, continuing supply strains, and worsening food insecurity.

On China, the Bank says that strict lockdowns to control Covid-19 outbreaks have been the main reason for slowing growth. Consumer spending has been particularly subdued, and trade and manufacturing investment have lost momentum, exacerbated by supply disruptions and the negative impact of the war in Ukraine.

The pandemic has also reversed the recovery of the real estate investment seen at the start of the year.

In response, authorities have already relaxed some property and financial regulations and eased fiscal and monetary policy. However, the Bank expects more stimulus measures to mitigate the impact of the lingering pandemic and worsening terms of trade.

The Bank is uncertain about the size, composition and effectiveness of policy stimulus, noting that increased investment in the stock of public infrastructure — the tried and trusted measure authorities are most likely to turn to — faces diminishing returns.

The outlook is subject to significant risks.

Repeated COVID-19 outbreaks and strict lockdowns across major cities would curtail the recovery of consumption and services activity, disrupt supply chains, and weigh on investor confidence. In addition, renewed stress in the housing sector would further reduce real estate investment and government revenues, affect the solvency of developers and local government financing vehicles, and weigh on house prices and consumer spending.

It is Covid-19 that hangs heaviest over the outlook. The Bank estimates that a resurgence could reduce China’s growth by a further 0.5 of a percentage point in 2022 and 0.3 of a percentage point in 2023.

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Shanghai Reopening Would Be China’s Most Powerful Stimulus Measure

Shanghai waterfront skyline seen in an archive 2015 photograph

THE EASING OF the lockdown in Shanghai on June 1 may prove the most crucial stimulus measure that authorities take to revive China’s economy and get it anywhere near the official target of 5.5% GDP growth this year.

The more-than-two-month-long lockdown has not been lifted entirely, though there is no staggering of the easing. Most people can move more freely around the city, provided they can show a green health code on their smartphone. Public transport within the city has restarted. Crucially, many businesses are reopening their doors, with in-person customers having to show a negative Covid test within the previous month 72 hours.

However, 10% of the population of 25 million residents in high-risk areas will remain confined at home. Confirmed Covid cases and close contacts still face quarantine or hospitalisation. A localised outbreak risks the reimposition of a neighbourhood lockdown. Residents returning from trips outside the city still need to quarantine. Schooling remains remote, and places of mass entertainment remain shut.

Nonetheless, word reaches this Bystander that the mood in the city is far more one of celebration and relief than the noble forbearing that official media portrays. That, in itself, is likely sending a message to city officials, who have not emerged from the lockdown covered in glory.

Residents have been angry at the strictness of the measures, city officials’ ineptness in enforcing them, leading to, for example, food shortages, and the fact that much of the financial aid has gone to businesses and factories, not to households.

The economic cost has been tremendous. An academic paper published earlier this year gives a sense of the likely scale of the cost — full percentage points of GDP. Shanghai is the country’s biggest and most affluent city and its financial, commercial and international business hub. It accounts for 3.8% of China’s GDP and 10.4% of China’s trade with the rest of the world (2021 data).

It will likely take months for the city’s economy to be operating at anything like normal again, not least because supply chains need to stabilise first.

The manner of the easing of the lockdown allows both President Xi Jinping and Premier Li Keqiang to maintain their positions on the need for the zero-Covid policy and the need to reopen an economy facing multiple headwinds, respectively.

Earlier this week, government departments started to flesh out the details of the 33-point stimulus package that Li announced on May 23. The measures are broad-ranging, including tax cuts, business subsidies and loans, and infrastructure investment. As important as staving off a potential recession, the stimulus aims to stabilise employment, the government’s short-term priority.

The measures also included initiatives such as streamlined customs and immigration intended to bolster the confidence of foreign firms manufacturing in China who might be thinking this is a time to look elsewhere.

The critical but beleaguered property sector has had separate support measures, including interest rate cuts.

The economic impact of getting Shanghai back to normal business would mean more to the national economy than all of the above.

Shanghai’s lockdown has been the most disruptive but only one of several in major cities that have provided a stark reminder of China’s willingness to throw the economy into turmoil when political priorities demand it.

As Li has repeatedly warned, the official target of 5.5% GDP growth is undoubtedly out of reach. Much has been speculated about a rift between Xi and Li ahead of the autumn’s Party Congress, the truth of which is probably impossible to know. Sometimes, economic tumult is just economic tumult.

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China Props Up Housing To Reinforce The Economy

FRIDAY’S CUT IN mortgage rates, the second this year, had been signalled, but its size was a surprise.

The People’s Bank of China lowered the five-year loan prime rate by 15 basis points to 4.45%, the deepest cut since the 2019 revision of its interest rate mechanism, and at least half as much again as private economists expected.

However, the central bank left its one-year reference rate unchanged at 3.70%. This hints that caution over policy easing persists even as authorities seek to boost the beleaguered housing sector to prop up an economy sagging under the weight of the zero-Covid strategy to contain outbreaks of infection.

Housing starts, sales and prices all fell in April. Construction activity fell by 44% year-on-year, following a 20% year-on-year drop in January-March. For the first four months of the year, residential property sales were down by 32.2% year-on-year and commercial property sales by 29.5%.

More than 100 cities have introduced measures in recent months to support first-time buyers while keeping speculative investors at bay. In the short term, the latter group’s return would most rapidly ginger up housing market activity, even if the long-term costs are undesirable.

For now, authorities can hope to do little more than stabilise the property downturn, especially while cities remain in lockdown. Reinflating prices would require broader stimulative measures, undoing several years of stop-go deleveraging of the debt risks in the economy.

Meanwhile, the scope for broader interest cuts is also limited by fears of accelerating the pace of capital outflows as the US Federal Reserve raises its rates.

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April’s Trade Figures Stiffen The Headwinds China’s Economy Faces

Longtan Container Terminal of Nanjing Port seen on May 6, 2022. Photo credit: Xinhua/Li Bo

THE TRADE REPORT for April brings further evidence of the headwinds facing the economy.

China’s General Administration of Customs reported today that goods exports grew by 3.9% year-on-year in April in dollar terms, the slowest pace since June 2020, while imports showed no growth year-on-year.

Since importers are paying significantly higher prices for commodities, this implies substantially lower import volumes than last year.

Lockdowns in big cities have severely disrupted global supply chains. At the same time, global demand for goods, especially electronics, is starting to weaken in the face of inflation squeezing consumers’ disposable incomes, and services recovering the share of spending lost to good goods during the pandemic.

The purchasing managers’ index for April showed that manufacturers’ employment intentions declined. That was also true in services, but it was the eighth drop in nine months for manufacturing. Premier Li Keqiang has promised to intensify efforts to stabilise the job market and expressed concern about the ‘grave’ outlook. The dotted line between unemployment and social instability always looks to top leadership to be short and threatening.

As Li indicates, monetary and fiscal policy is being selectively loosened, and there is likely more to come. Yet the latest trade figures add weight to arguments that the economy may grow little in the second quarter and might even contract.

The bind authorities find themselves in is that meeting the target of 5.5% GDP growth this year depends on the lockdowns easing substantially by the middle of the year. Under- and ineffective vaccination and the political dynamics of doubling down on the zero-Covid policy make that an impossibly tight deadline.

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Policy Shift Will Favour China’s Tech Platform And Real Estate Firms

THERE IS LITTLE doubt that China’s economic managers are ruffled. The combination of economic headwinds from the war in Ukraine to Covid’s resurgence with its large-scale lockdowns and the uncertainty over the global economy caused by inflation, supply chain chaos and tightening monetary policy are as disruptive as they were unanticipated.

The readout from Friday’s Politburo meeting was a clear recognition that the leadership understands the straitened state of the economy. Thus it is switching the balance of policy priorities from regulation and structural change back to growth.

Evidence of that can be seen in the Politburo’s signalling of an end of the campaign to ‘rectify’ the platform tech companies that started in late 2020, and its declaration that there needs to be liquidity support for beleaguered property development firms.

The English-language version of the readout put less emphasis on continuing regulation of the tech sector than the Chinese version, which, similarly, was clearer that controls on real estate speculation would continue. 

If that was an attempt to send different messages to domestic and international audiences, it strikes this Bystander as cack-handed.

Many international investors have recently turned bearish about China and moved capital out, believing the economy is in worse shape than even the official figures suggest, exacerbated by adherence to the zero-Covid policy.

However, they will judge the concrete support for the ‘healthy’ development of the platform tech and real estate sectors on its merits rather than its promise. That support will come sooner rather than later.

The government wants both sectors to thrive, especially now, but in a way that serves central policy objectives more directly than before. 

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World Bank Cuts China Forecast As Uneven Recovery Gets Rougher

THE WORLD BANK has trimmed its GDP growth forecast for China this year to 5.0%, 0.4 of a percentage point lower than its previous forecast made in October last year. The Bank says that growth could slow to 4.0% on a worst-case basis.

The new numbers are contained in the Bank’s latest update to its economic forecasts published ahead of its joint Spring meeting with the International Monetary Fund.

The reasons for the growth downgrade are familiar: a spike in Covid-19 infections causing strict lockdowns and disruption of supply chains, continuing strains on overleveraged property developers, the Russian invasion of Ukraine raising commodity prices, and tightening US monetary policy.

The Bank also highlights China’s structural slowdown and regulatory regime change.

It has this to say about China’s approach to containing Covid-19:

Eliminating CoViD-19 infections through a combination of testing-tracing-isolation and targeted shutdowns entailed a relatively small economic cost when the COVID-19 variants were less infectious. However, the highly transmissible but seeming less potent Omicron variant has increased the economic costs and reduced the health benefits of an elimination strategy. Both services and manufacturing PMis dropped in January reflecting CoViD-19 flare-ups and strict control under Beijing’s zero CoViD strategy.

Despite the changing tradeoffs, China is maintaining the strict strategy, perhaps because (a) tolerating low levels of infection may not be a stable equilibrium, (b) a spike in infections could overwhelm China’s limited health capacity in rural areas, and (c) the omicron variant may still have serious health consequences for China’s population because it has suffered fewer prior infections and been inoculated with a less effective vaccine.

The Bank estimates that the impact of pursuing zero-COVID will likely be to reduce 2022’s output by about 0.6%.

A longer-term Covid-related question raised by the Bank is whether the interruption caused by the pandemic to the trend decline in China’s share in the final-goods imports of the United States and the rising sourcing of intermediate goods from China by regional countries is temporary or not.

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China’s First-Quarter GDP Growth Raises An Eyebrow

Chart showing China's quarterly GDP growth year on year from 2019 to date

THERE HAS BEEN much about China’s latest surge in Covid-19 infections to cause a raised eyebrow.

That its largest city Shanghai, now entering its fourth week of strict lockdown, has only just officially reported its first three virus-related deaths is one. The first-quarter GDP figure announced today by the National Bureau of Statistics, at 4.8% growth year-on-year, is another.

Thre is a huge political incentive for officials not to report Covid-19 deaths, given Beijing’s doubling down on its narrative that its zero-Covid policy in prioritising saving citizens’ lives is superior to the West crass re-opening at any cost. That and ultra-narrow criteria for ascribing a death to Covid make it highly likely that Covid-19 deaths have been undercounted on a scale in China that far exceeds undercounting elsewhere.

Local officials have long suspected overcounting economic activity, although much less so of late. Yet every tallying muscle must have been strained to record 4.8% y-o-y GDP growth in the first quarter and 1.3% growth from the final quarter of 2021. Private economists had forecast around 3.5% and barely 1.0%, respectively.

It may well be that growth was sufficiently strong in the first two months of the quarter that it offset much of the sharp slowdown evidenced by March’s drop in retail consumption and slowing industrial output and investment spending. (It is also prudent to remember that these are preliminary data that may yet get revised.)

Retail sales contracted 3.5% from a year ago, the first decline since July 2020; industrial output growth decelerated to 5% from the 7.5% expansion in January-February. Investment growth also slowed to 9.3% in the first quarter from 12.2% in the first two months of the year.

The relative strength in industrial production and investment is surprising given the already-reported weakness in some of the sector numbers underpinning them, such as sharp falls in car and cement production.

The economic damage inflicted by Covid lockdowns would have intensified toward the end of March, with Shanghai going into lockdown on March 28. A group of economists at Chinese and US universities estimated that a month-long lockdown of the city would cut 2.7% off national GDP for the month.

Shanghai is now entering its fourth week of a lockdown that has closed many factories. The longer the lockdown-induced impacts on production drag on, the larger the spillover effects through supply-chain disruptions on the rest of the economy.

Beijing will be anxious to minimise those given the multiple headwinds the economy is facing, few, such as the Russian invasion of Ukraine with its consequent impact on commodities prices, within its control.

The Ministry of Industry and Information Technology has sent a team to help more than 600 companies in Shanghai restart operations, including those producing computer chips, cars and car parts, medical supplies and equipment and pharmaceuticals. ‘Closed-loop’ bubbles for industrial workers will be imposed. Limited production at plants supplying Apple and Tesla resumed this way over the weekend.

Less easy to address and politically more concerning is the rise in unemployment the lockdowns are causing. At 5.8% in March, joblessness was at its highest level since the early part of the pandemic.

The economy is likely to get worse in April before it gets better. China’s ambitious goal of 5.5% GDP growth for the year looks distant. Increasingly frequent warnings from top leadership about the economic headwinds from geopolitical tensions, inflation pressures and slowing external demand underline this.

More monetary and fiscal stimulus is inevitable to bridge the economy to the point where more effective vaccination can relieve the necessity for economy-sapping lockdowns to contain a virus whose increasingly contagious if less deadly mutations are outrunning zero-Covid’s capacity to contain them.

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Soft GDP Number Will Pressage More China Stimulus

THE PEOPLE’S BANK OF CHINA (PBOC)’s announcement that it was cutting banks’ reserve requirement ratio by a quarter of a percentage point from April 25 was well signalled.

It is likely the first in a series of small stimulus measures as authorities seek to counter the slowing of the economy in the face of the country’s worst wave of Covid outbreaks and soaring food, energy and metals commodity prices due to the war in Ukraine.

Premier Li Keqiang has stressed the need to ensure that economic growth picks up in the second quarter. Economic stability is the new watchword.

Monday’s first-quarter preliminary GDP figures are unlikely to make pretty reading. Year on year growth is expected to slow from 4.0% to around 3.5%, and quarter-on-quarter growth from 1.6% to barely 1.0%. The accompanying industrial production and retail sales numbers will also likely be soft.

Beijing will find it difficult to reach its 5.5% growth target this year, but there is no sign yet that it will be jettisoned.

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