The Chinese yuan blew through the C¥7 barrier in its exchange rate to the U.S. dollar on Wednesday as investment banks started downgrading their forecast for the Chinese economy this year on the back of poor output numbers.
Japan, by contrast, outdid expectations with the release today of its first-quarter growth figures. The Japanese economy moved out of recession and back into expansionary territory, with 1.6% growth for the March quarter, well above the expected 0.7% rate.
However, both China and Japan will face challenges this year as their export producers suffer the effects of poor demand in the West. While neither Japan nor China face a problem with high inflation, the follow-through impact of double-digit price hikes in the West is clouding the outlook for Asian manufacturers in particular.
The Chinese yuan has now weakened 4.5% since mid-January, when optimism was in full flow that China would enjoy a "revenge spending" bounce after suddenly scrapping its zero-tolerance Covid campaign in early December. But the latest economic numbers show that any optimism about a rapid recovery has given way to pessimism about demand both from global markets and local consumers.
April's activity numbers, released Tuesday, missed expectations across the board. Industrial output shrank 0.5% month on month and was well off forecasts for growth versus a year ago. A low base number last year when the Shanghai lockdown was in full effect last spring led to predictions that industrial output would enjoy double-digit growth, but the 5.6% year-over-year figure was half the 10.9% consensus estimate.
Retail sales rose 18.4% year over year for April, but again with the cautionary note that last year's number was heavily depressed by an almost total lack of activity in China's largest city. The harsh Shanghai lockdown also had a spillover effect on the surrounding Yangtze River Delta, one of China's hotbeds of production.
The April number didn't hit the expected high for 21.9% year-over-year growth. There are other worrying signs, with the unemployment rate among young people cresting to an all-time high of 20.4%. The issue of even university graduates struggling to find fulfilling positions as they enter the job market shows that employers are being cautious in their hiring. China's crusade against Big Tech has also created uncertainty for tech startups.
The poor April numbers followed through in the high-frequency figures released so far for May, causing Nomura to cut its forecast for full-year growth in China to 5.5%, from its previous 5.9% expectation. Its China economics team notes that "the recovery has been losing steam, due partly to weak confidence among consumers and business investors. As disappointment kicks in, we see a rising risk of slower activity growth, rising unemployment, persistent disinflation, falling market interest rates, and a weaker currency."
Housing sales did show signs of life after the lockdown last year compounded a lack of confidence in developers as they are forced to reduce debt. April's sales were up 16.7% compared with the same month last year, double the 8.8% rate for March.
Inflation sat at just 0.1% in April year over year. It's possible that China may briefly enter deflation, although that's not likely to last long. It would be extremely destructive to the economy if it did set in.
Japan knows that only too well, after suffering through the better part of three decades of deflation after its 1980s-era asset bubble burst. Today's numbers show that private consumption for the first quarter rose 0.6%, slightly higher than the expected 0.4% rate. Capital expenditures also expanded, up 0.9%, which was far better than forecasts of a 0.4% fall.
Japan only eliminated the last of its anti-Covid measures this month, so the domestic economy should be in strong and improving shape. Japan's exports, however, fell 4.2% for the first quarter, the first drop in six quarters. It's a turn for the worse driven by economic conditions elsewhere in the world that are likely to deteriorate further.
The Japanese yen has also weakened since mid-January, down 7.1% since then to ¥137 to the U.S. dollar. Asian currencies should have put the worst of their weakness behind them if the Fed pauses or stops its interest rate increases.
Equity markets are strengthening in Japan, where the broad-market Topix is now up 14.1% so far in 2023. Japanese stocks have shown steady progress that looks set to continue. Chinese stocks have shifted into reverse after earlier optimism, with the CSI 300 index of the largest listings in Shanghai and Shenzhen up just 1.9% year to date. They will lack any sense of momentum as long as the economic disappointments continue.
