Goldman Sachs with the note:
Covid restrictions weighed on consumption and services in November: Local outbreaks have become more frequent in China in recent months. November data show clear evidence of Covid-related restrictions weighing on consumer activity. Consumer services and small businesses are most affected and remain 10%-15% below their pre-Covid trends. Labor markets have softened because sectors hardest-hit by Covid restrictions tend to be more labor-intensive.
From “zero Covid” to “dynamic zero Covid”: Despite the toll “zero Covid” policy has taken on the economy and the risk from the more transmissible Omicron variant, we do not think the Chinese government will change course and adopt a “live with Covid” policy anytime soon. The human and economic costs from such a change could be enormous given China’s large population and low vaccine efficacy. Policymakers have shifted to a “dynamic zero Covid” approach, aiming at controlling local outbreaks early on rather than zero infections.
Housing activity improved sequentially but not out of the woods yet: Housing activity improved modestly from October to November, most notably with double-digit year-over-year increases in mortgage lending. However, many developers are still under financial stress and housing demand may weaken on falling house prices. A combination of policies to relax local purchase restrictions, to ease developer financing, and to lift consumer sentiment are needed to stabilize the sector.
Manufacturing benefited from strong exports and easing supply constraints: Exports remain the bright spot of the economy, supporting industrial activity. Easing energy constraint, lower upstream raw material prices, and increased availability of semiconductors have also contributed to the improvement in industrial production as well as manufacturing investment seen in November. Although these tailwinds may not fade quickly, further acceleration in manufacturing looks difficult without domestic demand picking up.
More policy easing needed to stabilize domestic demand and labor market: Both monetary and fiscal policies have eased somewhat in recent weeks, with the PBOC cutting RRR and the Ministry of Finance front-loading next year’s local government special bond issuance. However, given the consumption drag from recurring local Covid outbreaks and investment drag from the housing market, we believe more is needed to move year-over-year growth (which we forecast to be 3.1% in Q4) back to the “reasonable range” stressed by the government.
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