THE LATEST ECONOMIC indicators — industrial production (see above), retail sales and fixed asset investment for January and February — bring more evidence of the economic damage brought by the Covid-19 outbreak, and raise the possibility that China’s economy will contract in the first quarter.
All three indicators fell year-on-year both for the first time and by large margins, down 13.5%, 20.5% and 24.5% respectively, the National Bureau of Statistics reported. More concerning for authorities is that urban unemployment edged up to 6.2% in February, a full percentage point higher than in the previous month.
Authorities say that outside the outbreak’s epicentre, Wuhan and surrounding Hubei province, 95% of large enterprises and 60% of small and medium-sized businesses have returned to work. Nonetheless, they are still not operating at full capacity.
Further macroeconomic stimulus measures have been announced to keep the economy going. The central bank has cut banks’ reserve requirement ratios for the second time this year to make a further 550 billion yuan ($78.6 billion) available for loans and injected an extra 100 billion yuan through the medium-term lending facility. Additional injections of credit are likely to ensure businesses have the working capital to sustain a recovery in activity.
More fiscal stimulus — increased local government bond issuance and tax and fee cuts — are planned. Infrastructure projects, such as expanding 5G networks, already in the national plan will be expedited, an official of the National Development and Reform Commission says. That will help keep employment stable.
The worst of the outbreak appears to have passed for now in China, but that is not the case in the rest of the world. Significant markets for Chinese exports such as the United States and the EU are forecast to contract in the second quarter as a result. Thus recovery in China will be measured.
THE LATEST MONTHLY economic data show China’s economy is steadily decelerating its pace of growth. This Bystander chooses that formulation rather than, say, ‘China’s economy faces slowing growth’ because managing the transition from double-digit rates of growth in the fast-growth industrialization phase of development to lower but more sustainable growth rates as the economy becomes less dependent on infrastructure-investment and export driven growth is now the primary task of policymakers.
We knew from last month that first-quarter GDP growth was lower than in any quarter since the third quarter of 2012. We take further encouragement from the new raft of numbers showing fixed-asset investment between January and April grew at its slowest since 2001, at 17.3%; new property construction fell 22.0%; and aggregate new credit fell to 1.55 trillion yuan ($249 billion) in April from 2.07 trillion yuan in March. These are signs that the country is adapting to what President Xi Jinping called a few days ago the “new normal” slower pace of economic growth.
Along with that comes a slowing of the growth rate of industrial output. Year-on-year, it was up 8.7% in April, down from March’s growth rate of 8.8%. That might in the past have been a cause to open the credit taps, especially as the most recent monthly consumer price inflation figures show inflation at just 1.8%, an 18-month low. But not, we believe, this time — and especially as there are still demons lurking in the background among the unsustainably high levels of corporate debt and industrial overcapacity, the ricketiness of shadow banking and a property bubble that is far from being safely deflated.
There is a black cloud around the silver lining of China’s July factory production numbers. Industrial production increased 9.7% in the month, up from June’s 8.9% and its fastest pace since February. While that suggests the slowdown in growth is stabilizing, it has taken old-school construction and investment spending to do it. That is not a step forward for rebalancing the economy towards consumption and services.
Economic activity remains weak in China. April’s industrial output was up 9.3% in April from March’s 8.9%, a seven-month low, but short of expectations of 9.5% growth. The recovery that started in the second half of last year is not gathering any momentum. Second-quarter growth is on track to be little better than the first quarter’s 7.7%, and likely less than 8%.
That is testing policymakers’ patience. They would like to stimulate short-term growth, but are already running loose monetary policy. Any further loosening risks pushing up consumer prices and further inflating asset bubbles, particularly property prices. Meanwhile, state-led infrastructure construction spending, which has been a big driver of growth since the 2008 global financial crisis, is running out of steam and effectiveness, and the debt overhang, as much as 20 trillion yuan ($3.25 trillion), is a worry in Beijing.
The temptation, particularly for provincial and local officials, is to fall back on the tried and trusted remedy to provide a short-term boost to growth, but that also delays the necessary long-term rebalancing of the economy to which the new leadership repeatedly says it is committed. For now, policy makers are likely to stay their course, but they badly need some growth to steady their nerves. With the global economy sluggish, that is more out of their hands than they would like.
July’s monthly economic indicators now starting to be published show clearly that the hoped-for bottoming of China’s growth slowdown has yet to materialize. Both industrial output and retail sales growth slowed in the month, to 9.2% from 9.5% and to 13.1% from 13.7% respectively. That will add to the pressure on policymakers to increase the stimulative measures they have been taking. The fall in inflation to a 30-month low at 1.8% year-on-year gives them more headroom to do so.
Update: the unexpectedly slight 1% increase in exports in July is further evidence.