It’s amusing to watch, in the usual dark way, as the crashed Chinese economy continues to burn while CCP firemen point the hose in all the wrong directions.
First up, let’s catch up with how things are. COVID cases have fallen:
There are 1983 words left in this subscriber-only article.
Get your first month for $1
So lockdowns have eased a little:
The property crash is no better for either developers or punters:
Based upon the weekend PMIs, China is in recession. Pantheon:
The most disruptive outbreak since Wuhan weighs heavy on Chinese activityLockdowns and other restrictions only really started to bite from mid-March, so last month’s PMIs were only ever a taster of what was to come. April’s manufacturing PMIs are both at their lowest since February 2020, the depths of the pandemic. No measure of activity in the official manufacturing PMI escaped, but output—down to 44.4 from 49.5—and new orders—down to 42.6 from 48.8—led the fall in the headline, suggesting a sharp decline in industrial production data is due. New export orders also fell dramatically, to 41.6, from 47.2, as firms became unable to meet demand, with domestic logistics networks frozen. The one subcomponent to increase was stocks of finished goods, reflecting the same inability to transport anything within, or outside of, China in April. Delivery times, unsurprisingly, plunged in April, reflecting an increase in disruption, to 37.2 from 46.5, not far off the 32.1 recorded in February 2020 and by far the worst reading since then. This is a revealing data point; until now, China had managed to control outbreaks with only limited disruption to internal distribution; the worst reading before April and since the pandemic’s start was 46.5, in March, and before that, 46.7 in October, when a fuel shortage hit transport. The effects will be felt before long by the rest of the worldThe Caixin index tells a broadly similar story. With a greater focus on the private sector, and China’s coastal regions, it had already fallen more heavily last month, as Shanghai and Shenzhen bore the initial brunt. As a result, some subcomponents saw smaller falls than their official counterparts in April, but the output index still cratered, to 38.5, from 46.4, and delivery times plunged to 37.8, from 47.1. Stocks of finished goods and inputs both fell, even as backlogs of work rose, implying that even when restrictions end, it will take some time for output to recover, and orders to be met. Employment fell back to 49.2, after a surprise increase to 50.3 in March, bringing the Caixin survey back in line with the official PMI, which recorded a drop to 47.2, from 48.6. Labour market pressures are building; the cost of zero-Covid that worries policymakers most.The official non-manufacturing index includes both the service sector, and construction, and the former was always going to suffer the most from tighter zero-Covid policies. Sure enough, the services subindex hit 40.0 in April, from 46.7 in March. Construction also felt some pain, however, dropping to 52.7, from 58.1. Investment in infrastructure is unlikely to provide as much of an offset to a collapse in retail sales in April as it did in March; it’s hard to get shovels in the ground if they’re locked in the warehouse. Non-manufacturing new orders—an amalgam of both subsections—plunged to 37.4 in April, from 45.7 in March, and backlogs fell further, to 41.2 from 42.8. The outlook is far from rosy.The only positive is that all of the PMIs reported falling input and output prices. This is not surprising; crushing demand tends to curb inflation quite effectively. But it at least means China does not face the stagflationary headache which is starting to plague policymakers elsewhere. Unfortunately, given the snarled supply chains, the eventual reopening of China is likely to bring on a pounding headache quite quicklyWe expect to see a further shrinking of retail sales in April, given today’s data. Not only that, but industrial production should also record a monthly decline. FAI is likely to slow markedly, too, though it should avoid negative territory. Overall, Q2 GDP is set to shrink, relative to Q1, and we maintain our call for an outright recession, based on our GDP estimate, and a “growth recession”, using the official version.
The Politburo had its April meeting and addressed the recession but came up short again. Goldman:
- On growth: Policymakers highlighted “increased uncertainties due to Covid outbreak and Russia-Ukraine conflict” and reiterated they would “step up policy support, work hard to achieve economic growth and maintain growth within a reasonable range”. They also highlighted the need to “accelerate the implementation of supportive measures already announced, prepare additional easing measures, and properly handle policy intensity and relative magnitude under the guidance of economic targets.”
- More specifically on investment and consumption: the Politburo meeting stated to expand domestic demand and push for “comprehensive acceleration of infrastructure investment”. Policymakers would roll out a relief program for SMEs and industry hit by Covid, and facilitate consumption growth. The statement mentioned to “stabilize and expand employment”, and to “ensure normal operation of supply chains for key industries”.
- On platform companies: Politburo meeting sent positive signals by stating to complete targeted inspections of these companies and even to roll out measures to support healthy development of these companies.
- On property market: the broad statement follows recent communications. “Housing is for living not for speculation” was reiterated, and today’s statement also mentioned to customize policy based on the local situation, meet fundamental/upgrading demand and improve regulation on property developers’ presale funds.
- On Zero Covid policy – no signs of policy fine-tuning on this front from today’s statement. Same as President Xi emphasized in late March, policymakers continued to emphasize “people first, lives first”, stick with “dynamic zero-Covid” but at the same time to minimize economic costs of anti-pandemic measures in today’s statement.
- In addition, today’s Politburo meeting also discussed the “14th five-year talent development plan”, with a special focus on developing talents in technology and innovation.
Stocks dutifully rallied for the day but for no apparent reason. There is nothing here to turn things around. If anything, this is a list of glaring policy errors.
The first is on property. Giving developers greater access to escrow funds will only make the bust worse. Sales have collapsed owing to the counterparty risk of dying developers. Putting buyer down payments at greater risk will make it worse.
If the property market can’t rebound then infrastructure will underdeliver as well given cratered land sales will leave a gaping hole in local government funding.
And ‘zero COVID’ lockdowns hit everything, including infrastructure.
In short, the CCP just made its recession worse.