On the other hand, the economic spillovers are mounting:
In particular, property is a smoking crater:
The excellent Nomura sums it up:
China: 20 charts to take the pulse – the worst is yet to come
Over the past week, China’s Covid caseloads have moderated, but overall sentiment has worsened further. Shanghai remained in lockdown, and a new type of “hard quarantine” was implemented in some districts by setting up iron fences. One district in Beijing wa splaced under full lockdown for mass testing from today, triggering panic stockpiling of food and other necessities across the whole city.R egarding the impact of the zero Covid strategy (ZCS) on China’s economy and major types of financial assets, we believe the worst is yet to come. Global markets have been playing catch-up in recognising the severe consequences of China’s ZCS. Market sell-side GDP growth forecasts have been slashed aggressively over the past two weeks, but are now only consistent with our previous, long-held 2022 growth forecast of 4.3%. We view this as still too optimistic and expect another round of forecast cuts towards our current numbers (1.8% y-o-y for Q2 and 3.9% for 2022) in coming weeks.
Over the past week, headline Covid caseloads have moderated, but the real situation has not improved. The latest wave remains quite widespread geographically. As of 24 April, there were 20 provinces and three municipalities actively recording locally transmitted cases. In terms of regional daily case numbers, the most severe local outbreaks are still in the Shanghai municipality and Jilin province, with Beijing becoming the focus point over the weekend. This week, market attention will likely shift from Shanghai to Beijing, as a worsening Covid situation in China’s capital city could have a more profound influence on the future path of ZCS.
Based on our own survey, 46 cities are currently implementing full or partial lockdowns, or some kinds of district-based control measures, which involve stringent mobility restrictions on local residents. We estimate that around 343.5mn people are currently affected by these lockdown measures, down slightly from last week’s 356.5mn, in regions that contribute around RMB40.1trn (previous week: RMB43.9trn) of the country’s total GDP. These 46 cities account for 24.3% (previous week: 25.3%) of China’s population and35.1% (previous week: 38.4%) of China’s GDP.
Overall, there appears to have been some marginal improvements in high-frequency mobility and logistics data over the past week, as Beijing stepped up its efforts to normalize transportation and logistics. On cargo shipments, the 7dma of the road freight transport turnover index rose slightly to -25.9% y-o-y on 24 April from -28.3% a week earlier. The seven-day moving average of the express delivery turnover index at distribution centres of major delivery firms was -35.0% y-o-y on 24 April, up from -38.5% a week earlier. However, we should note that year-on-year growth of these indices remains deeply negative and is likely to worsen again due to the high transmissibility of Omicron.
Why hasn’t China stimulated more?
Because it is trapped and terrified by the impossible trinity of only being able to control two of three macro variables in interest rates, the currency and capital flows. If it cuts rates then CNY is going to crash and rerun the 2015 global rout. Pantheon:
We had warned of a turbulent Q2 for the renminbi, and the currency has duly delivered, depreciating 1.9% against the dollar since the start of April, the largest move since May. The headwinds for the currency have been building for some time, and we have discussed the threat from trade and capital flows repeatedly, most recently here. This creates a conundrum for the PBoC, which is under pressure to ease to support growth, but wary of triggering a repeat of 2015, when a sharp depreciation saw a haemorrhage of China’s FX reserves. Ultimately, we suspect the PBoC will have to acquiesce with Beijing’s wishes, with predictable consequences for the currency. Q2 will be turbulent, as we have said before, with the PBoC likely to inject “two-way volatility” in an attempt to prevent a selffulfilling run on the currency, while limiting monetary easing. But with growth set to disappoint again in Q2—we anticipate a recession on our measure of Chinese growth—more easing will have to follow. We expect the RMB to hit 6.8 to the dollar by yearend, with risks chiefly to the downside.
I agree. OMICRON cannot be beaten which means more lockdowns. The property markets is a wreck. Monetary and fiscal policy are both pushing on a string.
CNY is in all sorts of trouble. And, as we know, when CNY falls while DXY rises, it unleashes a tidal wave of deflation as EMs buckle under combined competitiveness and capital outflow strains.
Next up, commodities get flushed:
Those long dirt post-Ukraine are about to get a nasty surprise.
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
